The cash balance equation π = πΎππ was given by
- Keynes
- Pigou
- Robertson
- Marshall
Correct Answer: Marshall
Β Answer Explanation
The cash balance equation M = KPY was indeed given by Alfred Marshall, a renowned economist and one of the pioneers of microeconomics. A major contribution of Marshall to the field of economics was the cash balance equation, which is one of his most important contributions to monetary theory.
The variables in the cash balance equation are as follows:
M: It is the sum of all money held by individuals and firms in an economy. It includes currency in circulation and demand deposits.
K: It represents the cash balance coefficient (or liquidity preference) and it measures how much money people want to hold in the form of cash (currency and demand deposits) in relation to their income.
P: It represents the price level in the economy. It is a measure of the average prices of goods and services across the economy.
Y: It represents the total amount of goods and services produced in the economy as a whole.
Based on the cash balance equation, the total money demand (M) in the economy is directly proportional to the product of the cash balance coefficient (K) and real income (Y), and inversely proportional to the price level (P).
In addition to his contributions to monetary economics, Alfred Marshall emphasized the importance of money as a medium of exchange and a store of value. He believed that individuals and firms held money for both transactions and precautionary purposes, as well as for speculation.
Also, Marshall studied the concept of money velocity, which measures how quickly money circulates within an economy. As a result of this insight, later theories on the quantity theory of money and the Fisher equation were developed. He recognized that changes in the velocity of money could affect the overall price level and economic activity.
Why the other options are not correct
a. Keynes:
Another influential economist, John Maynard Keynes, didn’t formulate the cash balance equation M = KPY as Marshall did. However, Keynes introduced the liquidity preference theory of money demand. In Keynes’ view, people demand money for transactions and as a precautionary measure. His ideas emphasized the short-term fluctuations in economic activity and the role government policies play in stabilizing it.
b. Pigou
Pigou’s contributions is centered on welfare economics and the analysis of market failures, especially externalities. Pigou did not develop the cash balance equation.
c. Robertson:
Despite being an outstanding economist and monetary theorist, James Robertson is not credited with the cash balance equation M = KPY. Despite his interest in money’s role in the economy, Robertson did not formulate the cash balance equation explicitly as Marshall did.
Conclusion
The equation M = KPY, which represents the total money demand in an economy, was indeed developed by Alfred Marshall. There has been a lasting impact on the field of economics as a result of Marshall’s contributions to microeconomics and monetary theory. Understanding the demand for money and its implications for economic activity and price levels can be aided by the cash balance equation.
Keynes, Pigou, and Robertson made significant contributions to their respective fields, but they did not develop the cash balance equation as Marshall did. It is important for us to acknowledge the pioneering work of economists such as Alfred Marshall, whose ideas continue to shape our understanding of the modern economy, as we continue to study and explore the complexities of monetary economics.
In Fisherβs transaction velocity model, which one of the following is not an assumption