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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…