Money, Banking And Finance

Group Members
Name
1) 2) 3) 4) 5) Umer Draz Muhammad Imran Moazzam Khan Hafiz Azam Ishaq Hafiz Ahsan Saeed

Roll No.
07 08 09 11 12

Topic

The Value of Money

Money
According to Cole:
Money is anything that is widely used as a mean of payments and is generally acceptable in settlement of debts.

According to Kents:
Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.

According to Knap:
Anything which is declared by the state as money is called money.(The state theory of money)

The Value of Money

The value of money has significant importance in the study of all economic problems . By value of money is meant its purchasing power, its capacity to command goods in exchange for itself. The value of money varies inversely with the general level of prices. When the general prices increase, the value of money falls and when general prices decrease, the value of money rises.

Quantity Theory Of Money

Definition: Other things remaining unchanged, as the quantity of money in circulation increases, the price level also increases in direct proportion and the value of money decreases and vice versa.

General price level is determined by:

a) Supply of money b) Demand of money

Equation of Exchange:
V M 1V 1 T
M is the quantity of money V is the velocity of circulation of M M1 is the volume of credit money V 1 is the velocity of circulation of M1 T is the total volume of goods and trade

Price and Quantity of money

Value of money and Quantity of money

Assumptions of theory
1) Full Employment 2) T and V are constant 3) Constant relation between M and M1 4) Price level is passive factor

Criticism of theory
1) Unrealistic assumptions 2) Various variables in the transaction are not independent 3) Assumption of full employment is wrong 4) Rate of interest ignored 5) Fails to explain trade cycles 6) Ignores other factors of price levels

Cash Balance Approach of the Quantity theory of money

Definition:
The demand for money as the store of wealth, which is Robertson called as money on the wings is directly influenced by the level of peoples wealth in the country. As national income grows, the peoples desire to hold money in such also rises and vise versa.

Key Cambridge Equations

1) Alfred Marshalls Equation:

M= K Py
M = stands for quantity of money P = stands for price level y = indicate aggregate real income K = denotes the fraction of real income which people desire to hold in money form

2) Keynes's Equation:
P = denotes the price level of consumption goods n = stands for total supply of money in circulation k = Total quantity of consumption units which people want to hold in cash.

Criticism of Cash Balance Approach

1) 2) 3) 4) 5) 6) 7) Use of Purchasing Power for consumption goods. Role of rate of interest ignored. Unitary elasticity of demand. Real income not the sole determinant of K. Simple Truism. K assumed constant. No explanation of business cycles.

Modern Theory of Value of Money

The modern theory of value of money is the theory of demand for money and not the theory of income, investment and employment.

Basic feature of Friedmans Theory

Wealth Theory of demand of money.

Determinants of Demand for Money:

1) 2) 3) 4) 5) The rate of return on bonds. Rate of return on shares. Rate of change of prices. Degree of risk. Liquidity.

Money Demand Equation: Md =f (Yp)

The demand of money (Md) is a function of permanent income (Yp)

Criticism of Friedmans Theory

1) Influence of rate of interest ignored. 2) Relation between money supply and money GNP. 3) Proportional relationship. 4) Simultaneous operations of wealth and income.

Comparison between Fishers and Cambridges Equation

1) Similarities:
(a) Price Level (b) Usage of symbols

2) Differences:
(a) (c) (e) (f) Demand for money (b) Emphasis Time (d) Quantitative enquires Effect of quantity of money Subjective Valuation of the individual