Question

effects of Cambridge version

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Answer 1

Explanation:

Let us make an in-depth study of the explanation and criticism of the Cambridge version of the quantity theory.

Explanation to the Theory:

The Cambridge economists—like Alfred Marshall and A. C. Pigou—presented an alter­native to Fisher’s version of Quantity Theory.

They have attempted to establish that the Quantity Theory of Money is a theory of demand for money (or liquidity preference). The Cambridge version of the Quantity Theory of Money is now presented.

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Formally, the Cambridge equation is identical with the income version of Fisher’s equation: M = kPY, where k = 1/V in the Fisher’s equation.

Proof of Quantity Theory

Here 1/V = M/PT measures the amount of money required per unit of transactions and its inverse V measures the rate of turnover or each unit of money per period.

So if k and Y remain constant, P is directly proportional to the initial quantity of money (M).

Criticisms:

1. The Chain of Causation:

Critics argued that all the factors in the equation of exchange are variables and statistical studies have shown that they are interrelated. Moreover, the line of causation is not always from M (money supply) to P (the price level). It may be from V to P. A change in the rate of spending, all the other factors remaining the same, will result in a change in prices just as surely as would a change in the Quantity Theory of money, other things remaining the same.

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