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MFM Chap-02
MFM Chap-02
PART-I (Money)
Chapter 2
D.
QTM 
Crude Version:
Strict proportional relationship between changes in the price level
and the quantity of money.

Sophisticated Version:
Functional relationship between the price level and the quantity
of money.

Early Attempts:
Mercantilists; Locke; and Hume
Equation of Exchange


Supply of Money:

Demand for Money:

Equation of Exchange states that Total value of money expenditures  is just equal to total item sold .


If , , ,  Find  and .
If the money supply is doubled, Find  and .
Interdependence of variables
Static Theory
No discussion on V
The theory considers the supply of and demand for money at a particular moment of time rather
than over a period of time as assumed by the transaction approach.
In the Cambridge approach, demand for money implies demand for cash balances.
Cash balance is that proportion of real income which the people desire to hold in the form of
money.
Holding cash for transaction and precautionary motives depends on income, wealth and budget
constraint.
Opportunity cost of holding money: rate of interest, yield on real capital, and the expected rate
of inflation.
, So, 
If , ,  Find  and 
Pigou:

Extending the equation:


Robertson’s Equation:

Keynes’ Equation:


Keynes’ Extended Equation:

Equations
Fisher Robertson
 
 
  
Conclusion
Phenomenon of Money supply
V and K – Two sides of the same coin
Income Motive
Business Motive

Precautionary Motive:


People compare  and  in deciding whether to hold wealth in money or bond form.
If ,currently  is high which is expected to be higher in future (or interest rate would be lower) people
expect capital losses. So they will borrow money at lower interest rate or sale bond. The demand for money will
go up. The reverse is true when 

But, 
Therefore, 





For Instance: If  critical value of the  will be 

Reasons