P is a passive factor in the equation of exchanger which is affected by the other factors. On the other hand, the Cambridge version is realistic because it studies the psychological factors which influence k. What a rupee can buy in India represents the value of money of the rupee.
What happens to the money supply?
When prices rise or fall, the volume of business transactions also rises or falls. The value of money is of two types: The Assignment Problem It appears especially since the s both the government and the Fed are using fiscal policy and monetary policy interest rate fixing policy to address domestic disequilibrium and let the exchange rates find their equilibrium rates, thereby getting rid of the assignment problem.
The two approaches use almost similar equations. Pigou was the first Cambridge economist to express the cash balances approach in the form of an equation: Like the transactions equation, the cash balances equations are truisms. On the other hand, the Fisherian version is based on macro factors like T, total velocity of circulation, etc.
Fails to Explain Dynamic Behaviour of Prices: The cash balances theory establishes that the elasticity of demand for money is unity which implies that the increase in the demand for money leads to a proportionate decrease in the price level.
A fall in the price level raises the real value of cash balances which leads to increased spending and hence to rise in income, output and employment in the economy.
The neglect of the rate of interest as a causative factor between the quantity of money and the price level led to the assumption that the demand for money is interest inelastic.
Three topics are emphasized: This is what the Cambridge equation ignores and hence fails to integrate monetary theory with the theory of value and output. Since the cash balances k held by the people are outside the control of the monetary authority, p can be regulated by controlling n and r.
Further, it fails to point out the extent of change in the price level as a result of a given change in the quantity of money in the short period. In this case, the real balance effect will not cause a proportionate but non-proportionate change in the demand for money.
Add together all present values.In this example, the internal value of the dollar is greater than its external value.
Let’s say the dollar depreciate in value. As a result, there is a divergence between the. The value of money is categorized into the internal and external value of money.
The internal value of money refers to the purchasing power of money over domestic goods and services or otherwise the buying capacity of money. Many economists debate whether the availability of internal financing is an important determinant of firm investment or not.
A related controversy is whether the fact that internal financing is empirically correlated with investment implies firms are credit constrained and therefore depend on.
Time Value Of Money Applications; Net Present Value and the Internal Rate of Return instead of relying on external data (i.e. a discount rate), the IRR is purely a function of the. Internal And External Value Of Money.
create the most value for all stakeholders. Value is formed by different internal and external factors. This discussion will examine some of these factors in an effort to determine how a company’s worth is measured.
This shows that the value of money is related to the price level because goods and services are purchased with a money unit at given prices. But the relation between the value of money and price level is an inverse one.Download