Cambridge equation

The Cambridge equation formally represents the Cambridge cash-balance theory, an alternative approach to the classical quantity theory of money. Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of goods produced, the price level, amounts of money, and how money moves.

The Cambridge equation focuses on money demand instead of money supply. The theories also differ in explaining the movement of money: In the classical version, associated with Irving Fisher, money moves at a fixed rate and serves only as a medium of exchange while in the Cambridge approach money acts as a store of value and its movement depends on the desirability of holding cash.

{\displaystyle M\cdot {\frac {1}{k}}=P\cdot Y}

History and significance

The Cambridge equation first appeared in print in 1917 in Pigou’s “Value of Money”.[1]Keynes contributed to the theory with his 1923 Tract on Monetary Reform.

The Cambridge version of the quantity theory led to both Keynes’s attack on the quantity theory and the Monetarist revival of the theory.[2] Marshall recognized that k would be determined in part by an individual’s desire to hold liquid cash. In his General Theory of Employment, Interest and Money, Keynes expanded on this concept to develop the idea of liquidity preference,[3] a central Keynesian concept.

References

  1. ^Patinkin, Don (1 November 1984). Anticipations of the General Theory?: And Other Essays on Keynes. University of Chicago Press. p. 171. ISBN 978-0-226-64874-3.
  2. ^Froyen, Richard T. Macroeconomics: Theories and Policies. 3rd Edition. Macmillan Publishing Company: New York, 1990. p. 70–71.
  3. ^Skidelsky, Robert. John Maynard Keynes: 1883–1946. Penguin: 2003. p. 131.

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