According to Cambridge equation, the value of money depends upon
- Demand for money
- Supply of money
- Demand for goods and services
- All of the above
Correct answer: Demand for money
Answer Explanation
Demand for money refers to the desire by individuals and businesses to hold money for a variety of uses, including transactions and precautionary savings. A number of factors influence the demand for money, including economic activity, interest rates, inflation expectations, and economic uncertainty. People hold a larger portion of their wealth in the form of money when the demand for money is high, resulting in a decrease in the velocity of money (V).
Why the other options are not correct
b. Supply of money:
Although the supply of money is an important factor in the economy, it is not directly related to the Cambridge equation’s calculation of money value. In monetary policy, the central bank determines the money supply (M) as an exogenous variable. The value of money depends on how much money is required and how often it changes hands in transactions (velocity of money), as described in the equation.
c. Demand for goods and services:
The demand for goods and services influences the overall economic activity and the price level (P) in the equation, but it is not directly related to the value of money. In the Cambridge equation, the value of money is primarily determined by the velocity (speed with which money circulates).
d. All of the above:
This option encompasses all the factors mentioned in the other options, including the correct option (a). It is clear that these factors do impact various aspects of the economy, but the Cambridge equation emphasizes the relationship between money value and money demand.
Conclusion
According to the Cambridge equation, (a) is the correct answer. An individual or business’s desire to hold money determines its value, which is influenced by factors such as economic activity, interest rates, and inflation expectations. Policymakers can ensure economic stability and growth by understanding the demand for money.
According to the Quantity Theory of Money, the value of money depends upon
I am Bibisha Shiwakoti a final year BBS student from Janapremi College. I have completed my higher secondary education at Kalinchowk Secondary School.
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