Question

How is the cash blances equation an improvement over fisher's equation?

Answer 1

Answer:

The Cambridge cash balances approach to the quantity theory of money is superior to Fisher’s transaction approach in many respects. They are discussed as under:

1. Basis of Liquidity Preference Theory of Interest:

The cash balances approach emphasises the importance of holding cash balances rather than the supply of money which is given at a point of time.

It thus led Keynes to propound his theory of liquidity preference and of the rate of interest, and to the integration of monetary theory of value and output.

2. Complete Theory:

The cash balances version of quantity theory is superior to the transactions version because the former determines the value of money in terms of the demand and supply of money. Thus it is a complete theory. But in the transactions approach, the determination of value of money is artificially divorced from the theory of value.

3. Discards the Concept of Velocity of Circulation:

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.

4. Related to the Short Period:

Again the cash balances version is more realistic than the transactions version of the quantity theory, because it is related to the short period while the latter is related to the long period. As pointed out by Keynes, “In the long run we may all be dead.” So the study of the relationship between quantity of money and price level during the long run is unrealistic.

5. Simple Equations:

etc..

Explanation:

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