Mba Economics

Topics: Inflation, Macroeconomics, Keynesian economics Pages: 3 (627 words) Published: December 10, 2012
Demand & Supply of Money: a case in India
Over the years, Indian economy began with a barter system where commodities were used as money to the definition of money in the current scenario.Its development can be traced as follows:- Classical theory of money demand:

The main concern of this theory is to analyze how money may affect the Aggregate Demand (AD) of goods and services in the economy. According to the Classical Theory the AD is more or less stable. Shifts in the demand and the supply of money cause changes in the AD and the general price level. This theory does not explain the different components of AD. Keynesian Theory of Money Demand:

As opposed to the classical theory the Keynesian theory decomposes money demand into Consumption, investment, Government spending and trade balance. Mathematically,
AD = C+I+G+(X-M)
C = Consumption of currently produced goods and services
I = Investment
G = Government Spending in the currently produced goods and services X = Export
M = Import
According to the Keynesian Theory of the demand for money, the Aggregate demand is highly unstable due to changes in business and consumer expectations. Money does not play a vital role in the determination of the general price level and the Aggregate Demand of the economy. Quantity Theory of Money (Transaction Approach)

The Quantity Theory of Money can be explained by the equation: MsV = PY
or Ms = (Y/V) *P
Ms: Supply of Money
Y : Income Level
V: Velocity of Money
P: Price Level
This equation implies that keeping the velocity of money and the income level constant, changes in the supply of money would cause changes in the general price level. Transactions Demand for Money

The primary reason people hold money is because they expect to use it to buy something sometime soon. In other words, people expect to make transactions for goods or services. Speculative Demand for Money

The second type of money demand arises by considering...
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