The quantity theory of money states that the quantity
of money is the main determinant of the value. The theory attempt to explain
that due to the changes in the quantity of money the value of money (purchasing
power of money) changes. Any change in the quantity of money yield on exactly
proportional change in value of money (or the price level)
According
to Alfred Marshall, the Chief merit of the cash-balances equation of the
quantity theory of money is that it removes the serious complications which
creep in when we establish a relationship between the velocity of money in
circulation and the value of money as has been done in the cash-transactions
equation. The cash-balance equation explains that the value of money is a
function of its supply and its demand as measured by “the average stock of
command over commodities which persons care to keep in a ready form”.
The
emphasis placed on K in the cash-balances equation is more significant for
understanding the phenomenon of cyclical fluctuations than is v in the
cash-transactions equation. The cash-balances equation focuses attention on how
changes in the value of real cash balances cause cyclical changes in the level
of prices. A distrust of the people in the money unit in the country by diminishing
their willingness to hold it increases the prices and vice versa.
REFERENCE
John N.O. Ibe (2000) Fundamentals of
Monetary Theory, Policy
Glahoh and
Company
M.C Vaish (2005) Monetary Theory
Sixteenth Edition,
Vikas Publishing House PVT Ltd
Melzer, Allan H. “The Demand for Money:
The Evidence from the
Time Series,” Journal of Political Economy (June
1963), PP. 219-46.