But in the Cambridge equation P refers to the prices of final or consumer goods. The inflow is the present value of a lump sum, the sales price in six years discounted to the present: A fall in the price level raises the real value of cash balances which leads to increased spending and hence to rise in income, output and employment in the economy.
Above the EE curve, as the government spending increases, trade deficits and hence balance of payments deficits arise and the government has to borrow money from foreign central banks or use up its international reserve asset to defend the exchange rates.
The quantity theory of money states that the quantity of money is the main determinant of the price level or the value of money. Thus the theory is one-sided. Thus the cash balances approach considers the demand for money not as a medium of exchange but as a store of value.
Neglect of Saving-Investment Effect: The two versions emphasize on different functions of money. On the other hand, the Cambridge version is realistic because it studies the psychological factors which influence k. Like value theory, they regarded the determination of value of money in terms of supply and demand.
Study of Subjective Factors: Add together all present values. Similarly, a change in P may cause a change in M. 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.
If the exchange rates are allowed to move freely, the market will find the equilibrium value of e. But the fact is that the quantity of money influences the price level in an essential erratic and unpredictable way.
It is assumed that the demand for money is proportional to the value of transactions.
The neglect of the rate of interest as a causative factor between the quantity of money and the price level led to the assumption that the demand for money is interest inelastic. Prices may not rise despite increase in the quantity of money during depression; and they may not decline with reduction in the quantity of money during boom.
Thus, an increase in g increases inflationary pressure, thereby raising domestic price, which shifts the LM curve to the left. In the cash balances equations, transactions relating to final goods only are included where P refers to the level of final goods. But in the Cambridge equation P refers to the prices of final or consumer goods.
In the real world, those assumptions can break down, particularly in periods when interest rates are fluctuating. Fisher has explained his theory in terms of his equation of exchange: Like the transactions equation, the cash balances equations are truisms.
Thus the theory is one-sided. Rather, it is an indirect one via the rate of interest and the level of output. The introduction of income f or R or T in this equation as against V the velocity of circulation of money in the transaction equation has made the cash balances equation realistic and led to new formulations in monetary theory.
The Cambridge equation, like the transactions equation, assumes k and T or R or T as constant. More Importance to Total Deposits:. Internal and External Balance under Fixed Exchange Rate System money market: m s = l(r) + ky; l(r) = liquidity balance, ky = transactions balance the market will find the equilibrium value of e).
Thus, an external equilibrium requires a positive relationship between government expenditure and interest rate. The value of money is categorized into the internal and external value of money.
The internal value of money refers to the purchasing power of money over domestic goods and services or otherwise the buying capacity of money.
(ii) money market: m s = l(r) + ky; l(r) = liquidity balance, ky = transactions balance (k > 0, not capital-labor ratio). An internal equilibrium is attained when the output is at the full employment level.
An increase in g shifts the IS curve to the right, thereby raising the interest rate. Internal And External Value Of Money.
create the most value for all stakeholders. Value is formed by different internal and external factors.
This discussion will examine some of these factors in an effort to determine how a company’s worth is measured. Most internal auditors recognize that the additional time and money required to perform tasks in a manner that external auditors can rely on is minimal.
Often, all that is required is for. The value of money is categorized into the internal and external value of money. The internal value of money refers to the purchasing power of money over domestic goods and services or otherwise the buying capacity of money.Internal and external value of money