Cambridge Approach To Money Demand

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The Cambridge economists concluded that the demand for money would be proportional to nominal income and expressed the demand for money function as where k is the constant of proportionality. Because this equation looks fair like Fisher's (Equation 3), it would appear that the Cambridge group agreed with Fisher that interest rates activity no role in the demand for money in the short run. However, that is not the circumstance.

While Fisher was amplifying his quantity methodology approach to the demand for money, a group of classical economists in Cambridge, England, which contained Alfred Marshall and A. C. Pigou, were studying the same heading. Although their analysis led them to an equation identical to Fisher's money demand equation (Md = k x PY), their approach differed significantly. Instead of learning the demand for money by seeing solely at the level of transactions and the traditions that affect the direction people behave transactions as the Breitling Replica key determinants, the Cambridge economists queried how many money individuals would absence to hold, given a set of circumstances. In the Cambridge model, then, individuals are allowed some flexibility in their decision to hold money and are not completely jump by institutional constraints such as if they can use honor cards to make purchases. Accordingly, the Cambridge approach did not rule out the effects of interest rates on the demand for money.

The classical Cambridge economists acknowledged that 2 properties of money stimulate people to want to hold it: its utility as a medium of exchange and as a store of wealth.

To summarize, either Irving Fisher and the Cambridge economists developed a classical approach to the demand for money in which the demand for money is proportional to income. However, the two approaches different in that Fisher's accented scientific factors and ruled out any likely achieve of interest rates on the demand for money in the short run, though the Cambridge approach emphasized individual choice and did not rule out the effects of interest rates.

Because it is a media of exchange, people can use money to carry out transactions. The Cambridge economists agreed with Fisher that the demand for money would be narrated to (merely no decisive solely by) the level of transactions and that there would be a transactions component of money demand proportional to nominal income.

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That money likewise functions as a cache of wealth led the Cambridge economists to suggest namely the level of people's wealth likewise affects the demand as money. As wealth grows, an individual needs to store it along holding a larger amount of assets one of which namely money. Because the Cambridge economists deemed that wealth in nominal terms is proportional to nominal income, they too believed that the wealth component of money demand namely proportional to titular proceeds.

Although the Cambridge economists constantly remedied k as a constant and agreed with Fisher that nominal income is determined by the quantity of money, their approximate granted Omega Replica individuals to select how much money they wished to prop. It allowed for the feasibility that k could fluctuate in the short escape because the decisions almost using money to store wealth would depend above the yields and expected returns aboard other assets that also function as stores of wealth. If these specifics of other assets changed, k might change also. Although this seems a minor distinction between the Fisher and Cambridge approaches, you will watch that when John Maynard Keynes (a after Cambridge economist) extended the Cambridge approach, he arrived by a very another view from the quantity theorists on the magnitude of amuse rates to the demand for money.