Traditionalists' theory of monetary demand

• Introduction

The theories of demand for money can be mainly divided into four parts. They are: 1. Monetary demand theory 2. Keynesian monetary demand theory 3 Keynesian and post-Keynesian monetary demand theories; 4. Friedman's theory of modern monetary demand. It can be said that Irving Fisher was the first to formulate the theory of traditional monetary demand. Later, this theory, with some modifications, was developed by Cambridge economists such as Alfred Marshall, A. C. Pigou, D. H. Robertson, etc. in the form of the Cambridge equation. Later, Keynes' Mahasaya was a critical critic of the traditional monetary demand theory and introduced an alternative monetary demand theory. This theory of Keynes can be found in Keynes' book "General Theory" published in 1936. .

•  Importance of monetary demand

To know the equilibrium level of the money market in an economy, it is essential to study money demand. Equilibrium between money demand and supply is called money market equilibrium. Secondly, before formulating and implementing monetary and fiscal policies, it is essential to know the supply and demand of money in the economy. Sometimes macroeconomic policies are also followed to control money demand. Therefore, at the full employment level, it is essential to assess the monetary demand in the economy before formulating the necessary fiscal policies to stabilise the economy. It should be recognized that forecasting monetary demand is essential for achieving balanced growth in economically backward countries.

 Traditionalists' theory of monetary demand

Among the popular theories that analyze money demand is the conservative money demand theory. Theory one. The money demand equation introduced by Irving Fisher can be expressed as follows.

MV = PT—-----'(1)

Here, M = Money Supply ; V = Velocity of money circulation used for daily transactions: T= Total value of daily transactions ; P= price level.

In the above equation, PT represents money demand. Equation - 1

MV = PY—-------(2)

Can also be written as Here, Y = real income level. PY denotes monetary income. Fisher believed that the velocity of money circulation (V - velocity of money circulation) is determined by systemic factors. Furthermore, the GDP of the economy is constant at the full employment level.

 Fisher's monetary theory represents everyday affairs.

Md= PT/V

 Md = Money Demand.

Equation - 3 implies that money demand changes directly and proportionally with the price level if Y is constant. By implying that there is full employment in the economy, the conservative money demand elasticity can be said to have a value of one. This implies that there is an inverse relationship between the price level and nominal money demand.