Demand for and supply of money Unit 5 - Chapter
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Description: Demand for and supply of money Unit 5 Chapter 24 Money Demand Reference Case and Fair 3172020 Prepared by Tanjot Singh Department of Economics Gargi College What is money Money is anything that is generally acceptable as a means of
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Transcript:Demand for and supply of money Unit 5 - Chapter:
Demand for and supply of money Unit 5 - Chapter 24 Money Demand Reference: Case and Fair 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College What is money? Money is anything that is generally acceptable as a means of payment in the settlement of all transactions General acceptability – unique feature of money Money is what money does Purchasing power 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Functions of money Medium of exchange Measure of value /unit of account Standard of deferred payments Store of value 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Kinds of money Fiat money (legal tender) Coins Currency notes Fiduciary (credit) money Deposits Bank deposits – Demand and time deposits Post office deposits 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Measures of money supply M1 = C + DD + OD M2 = M1 + savings deposits with post office savings banks M3 (AMR) = M1+ net time deposits of banks M4 = M3 + total deposits with post office savings organization 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Quantity theory of money Variations in quantity of money impacts prices, money and real income, rate of interest Two approaches Quantity theory of money Keynesian theory Quantity theory Irving Fisher’s transactions version Cambridge cash balances approach 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Fisher’s QTM M*V = P*T M – stock of money – depends on monetary system V – velocity of circulation – average number of times a unit of money changes hands in a given period P – average price of market transactions T – physical volume of transactions Assuming V and T constant, direct relation between M and P Ms = Md 3/17/2020 Prepared by Tanjot Singh, Department of Economics, Gargi College Cash balances approach Marshall and Pigou Md = K P y K – behavioural constant – ratio of money income people like to hold in the form of money – measured in time units – 0
