13.6 Self Assessment questions13.7 Answers to check your progress13.8 Suggested Readings
The present lesson is concerned with the one of the approaches to quantity theory of money i.e., Cambridge quantity theory of money. As you aware, the quantity theory of money is, indeed, a very old theory. It was first propounded in 1588, by an Italianeconomist, Davanzatti. Later, the classical economists explained the value of money interms of the quantity theory of money. The quantity theory of money aims at explainingthe factors that determine the general price level in a country. In other words, it pinpointsthose causes which bring about changes in the value of money. In its unrefined form, thetheory states that the price level or the value of money is determined by the supply of money. The value of money, according to this theory, varies inversely as the supply of money; the price level, on the contrary, varies directly as the quantity of money.
13.2. The Neo-classical quantity theory of money or Cambridge Equation:
Neo-classical quantity theory of money also known as ambridge cash balance theory of demand for money, because it was put forward by Cambridge economists like Marshall,Pigou, and Robertson. It places emphasis on the function of money as a store of value or wealth instead of Fisher’s emphasis on the use of money as a medium of exchange.Marshall, Pigou and Robertson focussed their analysis on the factors that determineindividual demand for holding cash balances. Although, they recognised that currentinterest rate, wealth owned by the individuals, expectations of future prices and futurerate of interest determine the demand for money, they however believed that changes inthese factors remain constant or they are proportional to changes in individual’s income.