Revision:Classical Monetary Theory - The Traditional Quantity Theory

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The Transactions Approach

Fischer equation: ,

where:

• = Money stock;
• = velocity of circulation (average no of times each monetary unit is utilised in a given accounting period);
• = general P level;
• = total no of transactions.

If & assumed constant in ST, then: - therefore

Here, increase in Money stock initiates price rises, and the transactions demand for money then responds passively to this Price increase. Ceteris Paribus, MD unit elastic.

The Cambridge Cash Balance Approach

(Doesn’t seem esp. imp)

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