According to fisher, other things remaining unchanged,
as the quantity of money in circulation increases, the price level also in
direct proportion and the value o f money decreases and vice versa. Fisher
explained his quantity theory of money with the help of his famous equation of
exchange:
Mv=PT;.
Mv+Mi vi = Pt.
Cash balance approach was formulated by Marshall,
Pigou, Roberton, . According to this approach, the demand for money and supply
money. Cash-balance approach, consider the demand for money and supply of money
at a particular moment of time. The approach considers the demand for money not
as a medium of exchange but as a store value. Marshal has given his own
equation as M=KTP
RELATIONSHIP
BETWEEN (K) AND (V):
From the above relationship (K) = is the fraction of
real income which the people desire to hold money (proportion of the year’s
volume of trade over which the people hence the demand for money is given by
KT).
While
(V) is the transaction velocity of money circulation of bank deposit.
According to some economist, the two quantity equation
are fundamentally the same. While the cash transaction version of the quantity
theory of money emphasizes the value of money over a period of time by
incorporating the velocity of money (V) the cash balances equation explains the
value of money at a point of time by including the concept of the demand for
cash balances K. mathematically, the two equation can be reconcile by
substituting transactions equation and i/v for k in the cash balance. Marshall
thought that the essential cash or, in modern times have preference for
quantity is to bridge the time gap between the discrete receipts of money
income and its continuous, or at any rates less discrete spending. If the
transactions for money is such that the total money stock turns over, say, at
the rate of six times a year, then an equivalent of one-sixth of the annual
money value of cash balances at any given point of time. Thus, the demand for
the cash balances represented by kis the reciprocal of v, the velocity of money
in circulation, i.e; K=i/v. By substituting i/k = for V in the cash-transactions
equation MV= PT, we get M=KPT which is simply the cash balance equation
similarly, by substituting i/v for k in the cash-balance equation M= KPT, we
get MV=PT which is simply the cash-transaction equation.
According to (John.N.O. 1 BE) the two equation are
different observation of the same phenomenon. The cash balance equation
emphasizes on the “Money transactions equation looks at the money on the wing”.
The cash transactions equation is concerned with money as a flow while the cash
balances equation is with as a stock while the cash transaction equation is
stresses the transaction velocity of money (V) the cash balance approach
emphasizes the demand for cash balances K. Both the equation, however, regard
money serving only as a medium of exchange in the economy.
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.