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New Classical School (Rational Expectation Theory)

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New classical school (Rational expectation theory)
                 -      Rational expectation theory on quantity theory of money

                 -      Rational version on quantity theory of money
                 -      Radicalist version on quantity theory of money
                 -      Radicalist version on quantity theory of money
                 -      Lucas version on quantity theory of money
The term rational expectation is used in economics only since 1961 by John Muth (American economist) by publishing an article “Rational expectation and price movement”. So, he is also considered as the father of rational expectation revolution.
But, the concept and term “Rational expectation” is widely used, highly developed and made more popular by an American economist Robert Lucas in 1972 by publishing an article called “Expectation and neutrality of money” and award Nobel prize in 1995. Lucas is also known as the lender of new classical school of economic thought.
The theory says that peop…

Financial Institutions

Financial institutions (Intermediaries) Financial institutions are the formal and legal institutions that conduct various types of financial transactions and also provide financial services to its customers and members like accepting voluntary deposits, compulsory deposits, providing loans against collateral, investment on financial assets, discounting financial assets, exchange and transfer of foreign currencies, transfer of home currency within the nation, issue of travel cheque, bank draft, letter of credit, debit card, credit card, etc.

Hence, financial institutions work as a bridge between/among the ultimate savers and ultimate lenders, exchange of goods/s, transfer of currencies etc. There are two broad categories of financial institutions like banking and financial institutions BFIs and non-banking financial institutions NBFIs.
BFIs                                          NBFIs a) Central bank                        a) Development banks b) Commercial banks              b) Finance c…

Real Balance Effect

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Development of monetary theories Quantity Theory of money



Real Balance Effect
This theory was developed by Jewish economist DonPatinkin published a book called money, interest and prices in 1956. Don Patinkin did not agree with neo-classical version of quantity theory of money on dichotomy and proportional relationship between money demand and value of money and that is only in nominal term.
Real balance effect is also known as “Patinkin effect” is developed by Jewish economist Don Patinkin by published a well-known book titled “Money, Interest and Price” in 1956. Patinkin is not against the neo-classical version on quantity theory of money which Patinkin did not agree like:
             -          Dichotomy              -          Direct and proportional relationship between the size of cash balance and value of money              -          It is made only in nominal term
Real balance effect is the process of restoring previous level of cash balance (money demand) in real term, relative pri…

Keynesian version on money demand

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Keynesian version / Theory on money demand
Definition of money demand
According to J.M. Keynes, money performs both functions of medium of exchange and store in value. Under the medium of exchange, Md (where Md= money demand) is for transaction of various goods and services. Similarly under store in value, Md is for securing purchasing power in the market, to be wealthy in the society, to take precaution in the future rainy days and further income generation by investing it on various financial assets that can easily be converted into cash at any time. Hence, money is demanded by people with three different motives like:           a.Transaction motive (Mdt)… for goods and services           b.Precautionary motive (Mdp)           c.Speculative motive (Mds)… for bills and bonds So, the total money demand (MdT) = (Mdt + Mdp + Mds)
a. Transaction money demand (Mdt)
For consumers it depends upon size of income accumulation of wealth, frequency of receiving income in a given period of time, spending…

Concept, meaning and function of Money

Concept and meaning of Money In general money simply refers to the currencies (notes, coins), produced by central bank of the nation. But in subject of monetary economics and financial and public economics, the concept of money isn’t this simple. Many arguments or views are given by different economists regarding the money.

We considered here definition by some of the authors

"In order for anything to be classed as money, it must be accepted fairly widely as an instrument of exchange." -  A C Pigou.

"Money is anything that is habitually and widely used as means of payment and is generally acceptable in the settlement of debts." - G D H Cole.

"Money constitutes all those things which are at any time and place, generally current without doubt or special enquiry as a means of purchasing commodities and services and of defraying expenses." - Alfred Marshal

By money is to be understood "that by delivery of which debt contracts and price contracts are discharged…

Decomposition or sources of high-power money

Decomposition or sources of high-power money (H) with the help of the balance sheet identity of the central bank.
High-power money (H) is the currency (notes, coins) produced by the central bank that consists of the currency (C) held by people in their hands or pockets, total cash reserve (R) of BFIs and other deposits of government, government enterprises and foreign offices (OD) with the central bank. i.e H = C + R + OD It is called high-powered money as on the basis of which all BFIs create money in the form of demand deposits (DD) under the credit creation process (CC). There are many sources of (H) that can be decomposed with the help of the balance sheet identity of the central bank i.e Total assets = Total liabilities             ML + NML = FA + OPA             ML = FA – NML + OPA             ML = FA – (NML - OPA)             ML = FA – NNML Where, ML = Monetary liabilities NML = Non-monetary liabilities OPA = other physical assets FA = Financial assets NNML = Net non-monetary liabilities H …