Page 107 - DECO402_Macro Economics

Macroeconomic Theory

Notes 12.2 Value of Money and Price Level
Value of various goods and services is expressed in form of money, but money’s own value cannot be
expressed in form of money. If value of money is expressed in form of goods and services there will
be lacs of values of money because lacs of goods and services are found in this world. For doing away
with this difficulty we calculate a group value of money. For this we select few such representative
goods and services, which we use daily. Their average price is calculated and it is called general price
level. There is an inverse relation between the value of money and general price level. When general
price level decreases, value of money increases.

1
Value of Money =
Price level (P)
(Here P: Price level)
In the words of Irving Fisher, “The purchasing power of money is the reciprocal of the level of prices,
so that the study of purchasing power of money is identical with the study of price level.”

Notes Value of various goods and services is expressed in form of money, but money’s
own value cannot be expressed in form of money.

12.3 Theories of Value of Money

In theories relating to value of money, it is studied that how value of money is determined to be
reciprocal of the price level.
In the reference, two important theories are as follows: (i) Quantity theory of money (ii) Keynesian
Theory of Money. In this lesson, both the theories will be studied extensively.

Self Assessment
Multiple Choice questions:
4. The purchasing power of money is the reciprocal of the level of prices—
(a) Reciprocal (b) Identical
(c) Opposite (d) None of these
5. There is an inverse ............. relation between the quantity of money and value of money.
(a) abysmal (b) proportionate
(c) one-to-one (d) none of these
6. Prof. Miltion Friedman presented modern ............. theory.
(a) Quantity (b) cost
(c) Curve (d) None of these

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