Business Law

Topic: The Value of Money

By: Riaz Hussain Ansari

Lecturer Department of Business Administration
University of Sahiwal

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Learning Objectives

You will be able:

Critically examine the fisher’s Quantity theory

of Money
What is Cambridge version of the quantity

Theory of Money
Modern theory of value of Money

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 The value of Money

 By value of money is meant its purchasing power.

Its capacity to command goods in exchange for
itself.
 The Value of money varies inversely with the
general level of prices.

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 Quantity theory of Money;
Fisher’s Transaction Approach
The purchasing power of money has stated
that the value of money in a given period of
time depends upon the quantity of money in
circulation in the economy.

 Supply of Money
 Demand of Money

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Quantity theory of Money; Fisher’s
Transaction Approach

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 Quantity theory of Money; Fisher’s
Transaction Approach
Equation of Exchange (Diagram)

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 Quantity theory of Money; Fisher’s
Transaction Approach
Assumptions of the theory
FullEmployment
T and V are Constant

Constant Relation between M and M

Price level is a passive factor

Criticism of the theory

Unrealistic Assumptions
Various Variables in the transaction are not independent

Assumption of full employment is wrong

Rate of Interest Ignored

Fails to explain trade cycles

Ignored other factors of price level

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 Cash Balance Approach to the Quantity
Theory of Money
 Medium of exchange function
 Store function of money
 At a particular moment of time
 Over a period od time as considered by the
transaction approach
 Demand for money
 Demand for cash balances
 For transaction and precautionary motives
 Money on the wings

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Cash Balance Approach to the Quantity
Theory of Money

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Cash Balance Approach to the Quantity
Theory of Money

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 Criticism of Cash Balance Approach

 Use of purchasing power for consumption

goods.
 Role of rate of interest ignored.
 Unitary elasticity of demand.
 Real income not the sole determinant of k.
 Simple truism.
 K and T assumed constant.
 No explanation of business cycles.

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Modern Theory of Value of Money

Demand for money and not the theory of

income, investment and employment.
Basic Features of Friedman’s theory
Wealth theory of demand for money.

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Determinants of demand for Money

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 Criticism of Friedman’s Theory

 Influence of rate of interest ignored

 Relation between money supply and money
GNP.
 Proportional Relationship
 Simultaneous operations of wealth and
income.

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Comparison of fisher’s approach
with Cambridge approach

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 Comparison of fisher’s approach with
Cambridge approach
Differences (Fisher’s Equation)
The demand for money is to exchange goods.
In the equation, the emphasis is on the velocity of circulation.

The equations explains the value of money for a period of time.

The quantitative enquiries are possible with the equations and it

can be statistically measured as well.

This theory is mechanical because it fails to explain the effects of

quantity of money on price level in detail.

The equation does not integrate the theory of money and the

general theory to supply and demand

It does not analyze the subjective valuation of the individual and

thereby ignores the foundation of all economy activities

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 Comparison of fisher’s approach with
Cambridge approach
Differences (Cambridge Equation)
The demand for money is for the store of value.
In the equation, the emphasis is on K.

The value of money is elaborated at a given point of time.

The quantitative enquiries are not possible with the equations

and it cannot be measured statistically.

This version does attempt to elaborate on the effects of quantity

money over price level using the desire of the people to hold
money.
These equations integrate the monetary theory with the general

supply and demand theory.

It ensures first preference for the subjective valuation of the

individual which is the basis for economic activities

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Any Question?

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Many Thanks

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