Page 137 - DECO402_Macro Economics

Macroeconomic Theory

Notes For final asset holders the actual demand of money can be possible as the function of main following
variables:
1. Total Asset: Total wealth is the identical of Budget constraint. Total asset should be divided
into different assets. Behaviorally, the estimations of total asset are available on some times.
Except it, income works as the indicator of the asset. So according to Friedman income is
an agent of wealth.
2. Division of Asset between Human and Non-Human Forms: The main source of asset is the
productive capacity of humans which is human asset. But the change of human asset into
non-human asset or vice versa, is under Institutional Constraints. It can be done from buying
the non-human asset by present earnings or from the use of non-human asset for being the
trained by financial management. So the fraction of total asset in the form of non-human
asset is a very important variable. Friedman says the ratio of non-human to human asset or
the ratio of asset to income as ω (Omega).
3. Expected Rates of Return on Money and Other Assets: These rate of returns are the another
form of the price of a commodity, it’s substitutes and it’s complementary in Consumer
Demand Theory. The printed rate of return can be zero as generally, is on currency, or negative
as it mostly on demand accounts on which net service taxes are payable, or positive as on
those demand accounts on which interest is payable and generally on time accounts. Two
parts are included in the rate of return printed on other assets: first, any presently Payment
receipt or cost as interest on bonds, devident on shares and the storing cost of physical assets;
and second, the change in the prices of these assets which become important in the recession
or inflation situations.
4. Other Variables: Other variables except income can affect the importance of money related
to services, which determine the actual liquidity. Except liquidity the interest and preference
of assets holders are also variables. Another variable is the trade in present capital goods by
the final assets holders. These variables also determine the demand function of money along
with the other types of securities. These variables are named as μ (Mu).

Notes Quantity Theory is firstly a money demand theory. It is not the theory of production
or money income or price level.

Forms of Assets

According to Friedman, broadly all the sources of income or consumable services are included in assets.
It is capitalized income. Friedman means from income is ‘Permanent income’ which is the average
expected yield of lifetime of assets. assets can be hold from the five different forms of assets- Money,
bonds, equities, physical commodities and human capital. Every form of assets has it’s own quality
and these give different returns, which is described as following—
1. Money: Money is taken in detailed mean in which currency, demand accounts and time
accounts are included in which interest is given on deposits. So money is luxury commodity.
It gives the actual return to holder in the form facility, security etc. which is generally
measured in price level (P).
2. Bonds: Bonds are defined as the form of claims of stream at the time of payment, which is
constant in nominal units.

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