Page 125 - DECO402_Macro Economics

Macroeconomic Theory

Notes y Quantity Theory of Money: There is directly proportional relation between Quantity of
Money and General Price-level and there is inversely proportional relation between Quantity
of Money and Value of Money.
+
y Fisher’s Equation: PY = MV + M′V′or P = MV M V′′
Y
y Assumptions of Quantity Theory of Money: (i) The moving speed of money v and v’ is
constant. (ii) Trade Exchange is constant. (iii) Full Employment. (iv) The ratio of M and m’ is
constant.
y Criticism: (i) The relation in quantity of Money and Price-level is a general truth. (ii) This theory
is based on unrealistic assumptions. (iii) The variables taken in this model are considered as
independent but actually they are not independent. (iv) This theory is one-sided because it is
centered on money supply. (v) This theory considers Price-level as an inactive cause which
is wrong. (vi) This theory can only be used in full employment condition only. (vii) This
theory fails to explain Trade circle. (viii) This theory indicates inconsequence. (ix) It ignores
the significance of interest rate. (x) It is very tough to measure the moving speed of money.
(xi) It explains the non-monetary factors. (xii) Change in Price might be the result of change
in income-level not of change in quantity of money.

y Marshall’s Equation: M = kY + k′ A
kR
y Pigou’s Equation: P =
M
M
y Robertson’s Equation: P =
kT
y Criticism of Cambridge Version of Quantity Theory of Money: (i)It is based on unrealistic
assumptions. (ii) It ignores money demand for gambling objective. (iii) Circular logics are
taken in this theory. (iv) It is an incomplete theory. (v) It ignores the effect of interest rate. (vi)
It ignores the effect of realistic factors. (vii) It fails to explain Trade Circle. (viii) There is lack
of combination of Value theory and Money theory in this theory.
y Keynesian Theory of Money and Prices: Till when there is unemployment in economy
production and employment is increased because of increment in quantity of money. Once
there will be full employment in economy then increment in quantity of money will increase
the price-level in proportional form.
E IS
−
y Keynes Equation: n = +
O O
y Superiority of Keynesian Approach Over Quantity Theory of Money: (i) It is helpful to
integrate Money Theory with Value Theory. (ii) It is actually a more realistic theory. (iii) ) It is
helpful to integrate Money Theory with Production Theory. (iv) It explains causal processes
truly. (v) It is a better guide of Economic Policies.

Self Assessment

State whether the following statements are True or False:
7. Quantity Theory of Money is valid only in full employment condition.
8. Lard Ripen has integrated Money Theory with Production Theory.
9. Full employment condition is a rare condition.
10. The change in quantity of money doesn’t affect interest rate.

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