Question

Discuss the theory of demand for money as discussed by Classical Economists and Post-Keynesian Economist

Answer 1

The demand for moneyis the desired holding of money balances in the form of cash or Bank deposits. Money is dominated as store of value by interest-bearing assets. However money is necessary to carry out transactions.

CLASSICAL APPROACHES TO THEORY OF DEMAND FOR MONEY

1.. quantity theory approach the concept of quantity theory of money begin in the 16th century as gold and silver in flows from the Americas in to Europe were being entered into coins the resulting rising inflation. in monetary economics the quantity theory of money is the theory that money supply has a direct positive relationship with the price level. Critics of the theory argues that money velocity is not stable and in the short run prices sticky so the direct relationship between money supply and price level does not hold.

A) Fisher's transactions approach:

This approach first emerged in fisher's book the purchasing power of money in 1911. for most economist of that period money was viewed as solely as a means of exchange. The only reason for holding money was to facilitate transactions. Fisher's analysis commences with a simple identity sometimes referred to as equation of exchange. MVt=PT...M = MONEY SUPPLY, Vt = TRANSACTIONS VELOCITY OF CIRCULATION OF MONEY , P = PRICE LEVEL, T = THE NUMBER OF TRANSACTION UNDERTAKEN FOR PERIOD

B) The Cambridge cash balance approach:

This approach considered the demon for money not as a medium affecting but as sister of value according to the cash balance approach the the new of money is a reminder buy the demand for and supply of money.

C) The transmission mechanism :

The transmission mechanism sets out the process by which a change in the money stock effects economic activity. In the classical context this requires a clear explanation of how ∆M-∆P. classical economics argued that there would be both a direct and indirect mechanism. The direct mechanism is a direct influence of a change in M on expenditure and the price level whilst the indirect mechanism operates through the interest rate.

POST KEYNINESIAN APPROACHES TO DEMAND FOR MONEY:

POST KEYNINESIAN THEORY OF ENDOGENOUS MONEY HAS BEEN FLOURISHING AND HAS PROMPTED A RETHINKING OF THE COMPLEX NATURE OF MONEY IN ECONOMIES.

1)Patinkin and the real balance effect:

The real balance sheet effect is one of the three basic effect that indicate why aggregate expenditure are inversely related to the price level. The real balance effect works like a higher price level decreases the purchasing power of money resulting in a decrease in consumption expenditures, investment expenditures, government purchases, and exports. A lower price level has the opposite effect causing an increase in the purchasing power of money which result in an increasing consumption expenditure investment expenditure government purchases and net exports.

2) Baumol and Tobin model

The theory relies on the trade-off between the liquidity provided by holding money and interest for gone by holding ones assets in the form of non-interest bearing money. The key variables of the demand for money are then the nominal interest rate , the level of real income which corresponds to the amount of decided transactions and to a fixed cost of transferring one's wealth between liquid money and interest bearing assets. The model was originally developed in order to provide microfoundations for aggregate money keynisian function is commonly used in condition and monetarist macro economic models of the time. Later on the model was extended to a general equilibrium setting by Jovanovic and David Romer.

3) friedman and the modern quantity theory:

The quantity theory of money dating back at least to the mid16th century Spanish scholastic writers of The salamanca school is one of the oldest theories in economics. Modern students know it is the proposition stating that an extra geniosly given one time change in the stock of money has no lasting effect on real variable but leds and ultimately to a proportionate change in the money price of goods. More simply it declares that all else being equal, money's values for purchasing power varies inversely with its quantity.