Discussion 2203 unit 7 PDF

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Discuss the modern quantity theory and the liquidity preference theory. The modern amount theory is usually thought superior to Keynes’s liquidity preference theory as a result of it's a lot advanced, specifying 3 forms of assets (bonds, equities, goods) rather than only 1 (bonds). It conjointly doesn't assume that the come-on cash is zero, or maybe a continuing. In Friedman’s theory, the rate isn't any longer a constant; instead, it's extremely foreseeable and, as in point of fact and Keynes’s formulation, pro-cyclical, rising throughout expansions and falling throughout recessions. John Maynard Keynes’s liquidity preference theory and Friedman’s modern quantity theory of money. Building on the work of earlier scholars including Irving Fisher of Fisher Equation fame, the late, nice economic (Friedman)expert treats money like many different assets, last that economic agents (individuals, firms, governments) got to carry an exact quantity of real, as opposition nominal, money balances. If inflation erodes the shopping for power of the unit of account, economic agents will get to carry higher nominal balances to compensate, to keep their real money balances constant. the number of those real balances, the economist argued, was a function of permanent gain (the gift discounted price of all expected future income), the relative expected to come back on bonds and stocks versus money, and expected inflation. Wright, R.E. & Quadrini, V. (2009). I can also say People can rather have money during times of low inflation and high financial gain. folks also will invest their cash into stocks, bonds, or different assets once these expected returns are over the returns with money. it should be laborious to believe with all of the fees paid to the bank to amass these assets, however, inflation will build the returns look quite meek compared to the returns one would acquire during times of

boom. it's important to notice that the fashionable (modern)amount theory doesn't embody interest rates (Wright & Quadrini 2009). John Maynard Keynes developed the liquidity preference theory and he describes the speculation in 3 motives that verify the demand for liquidity (Wright & Quadrini 2009). 1st is that the transaction motive that states that people have a preference for liquidity to ensure comfortable money available for basic day to day desires. people have a high demand for liquidity to hide their shortrun obligation like paying rent and shopping. Second is that the precautionary motive that relates to individuals’ preference for extra liquidity within the event of a sudden event that needs a considerable outlay of money like house and automotive repairs (Wright & Quadrini 2009). The third is that the speculative motive that suggests that once interest rates are low, demand for money is high and people might like better to hold assets till interest rates rise.

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Wright, R.E. & Quadrini, V. (2009). Money and Banking. Saylor Foundation. Licensed under Creative Commons Attribution-Noncommercial-Share Alike CC BY-NC-SA 3.0 license. Available from: https://www.saylor.org/site/textbooks/Money%20and%20Banking.pdf...