Write short notes Nominal v/s Real cash balance
Answers
At the outset it is important to introduce the distinction between nominal and real cash balances. Cash balances are another term for money. Nominal cash balances are money of the current purchasing power of a unit of money (say, a rupee). Real cash balances are money of some base-year purchasing power. A nominal rupee is nominally always a rupee. But its purchasing power in terms of real goods and services can vary from time to time with changes in the general price level.
Then, it is said that the real value (purchasing power) of a (nominal) rupee has been changing over time. For making real-value comparisons, first a reference point or a base year is chosen. Suppose we choose 1961-62 as our base year with the wholesale price index number =100. A rupee in this year had a certain amount of purchasing power at the prices prevailing during the year. Suppose the average value of this index number for the year 1979-80 was 400.
The nominal cash balance is the supply of money that the company expects to get without creating any changes due to inflation. Real cash flow of a company is the supply of money with making changes for inflation.
Explanation:
Nominal Cash Balance
- Nominal supply of money is the supply of cash as which is evaluated during a specific period of time.
- Nominal cash balance is the present purchasing power of the money.
- During high inflation rate the nominal cash balance becomes more than real cash balance
Real Cash balance
- Real supply of cash is the money supply which is there after being adjusted for the changes in inflation.
- It is a fixed value of money which can be used without inflation over some time.
- Real cash flow is very effective in projecting the present condition of a company's cash flow situation.
To know more about nominal cash flow
Credit balance of nominal accounts indicates?
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