Macroeconomics: Theory and Policy

13

Demand for Money and the Rate of Interest: The Classical Approach

After studying this topic, you should be able to understand

• The crux of Fisher’s quantity theory is his famous equation of exchange, MV_T = P_T T.
• The most important feature of the Cambridge cash balance approach is that the demand for money is a function of money income.
• According to the classical theory, the rate of interest is determined by the demand and the supply of capital.
• In contrast to the classical theory, the loanable funds theory incorporates both the monetary and the non-monetary factors in the determination of the rate of interest.

INTRODUCTION

This section of the book is devoted to the monetary sector. The last two chapters analysed money and the determinants ...