Question

Explain the fisher's equation of exchange.how is the cash balance equation an improvement over equation.

Answer 1

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“The quantity theory of money is a truism.” Fisher's equation of exchange is a simple truism because it states that the total quantity of money (MV+M'V') paid for goods and services must equal their value (PT).

$P =\frac{MV}{T}$

The cash balance approach relates the process of determination of the value of money to cash the subjective valuations of individuals who are the real force behind all economic activities

$P = 1/k.M/Y$

The cash balances equation an improvement over fisher's equation

The cash balances approach is superior to the transactions approach because it altogether discards the concept of the velocity of circulation of money which 'obscures the motives and decisions of people behind it.

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