What is the amount of money that people want to hold as a store of value?
Quesion: What is the amount of money that people want to hold as a store of value?
The amount of money that people want to hold as a store of value depends on their preferences, expectations, and opportunities. A store of value is an asset, currency, or commodity that can be stored and retrieved at a later date without losing its value. Money can serve as a store of value because it can be saved, retrieved, and exchanged while maintaining its purchasing power.
According to the Cambridge cash-balance theory, which is represented by the Cambridge equation, money's ability to store value is more important than its function as a medium of exchange. Cambridge claims that the demand for money is derived from its ability to store value. The equation is:
$$M = kPY$$
where M is the total amount of money in circulation, k is the fraction of income that people want to hold as money, P is the price level, and Y is the real income.
The equation implies that the demand for money depends on the price level, the real income, and the fraction of income that people want to hold as money. The fraction k reflects people's preferences for liquidity and their expectations about inflation and interest rates. A higher k means that people want to hold more money as a store of value, and a lower k means that people want to hold less money as a store of value.
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