Which of the following is another name for the Cambridge approach to quantity theory?
Show answer & explanation
Correct answer: A
Explanation
Correct Answer
Cash Balance Approach
Explanation
The Cambridge Quantity Theory of Money is also known as the Cash Balance Approach. This theory emphasizes that people prefer to hold a certain portion of their income in the form of cash balances. Therefore, it focuses on the demand for money and the amount of cash individuals wish to keep with themselves.
According to this approach, the value of money depends not only on its use in transactions but also on how much of their income people choose to hold as cash.
Key Points
• The Cambridge Quantity Theory is known as the Cash Balance Approach.
• It places special emphasis on the demand for money.
• It assumes that people prefer to keep a portion of their income as cash.
• It differs from Fisher's Transactions Approach.
Additional Facts
• The Cambridge equation is generally expressed as M = kPY.
• Here, k represents the proportion of income that people wish to hold as cash.
• The theory focuses more on the demand side of money.
Important Questions
Question: What is another name for the Cambridge Quantity Theory?
Answer: Cash Balance Approach.
Question: What does the Cambridge Approach mainly emphasize?
Answer: The demand for money and the cash balances held by individuals.