What is value of money? How it is related to price level? How the value money is determine by the saving and investment theory of keyn’s?

Value of money:

Value is money is nothing but purchasing capacity of money. To determine value of money there are three approaches-

1. Fisherian theory

2. Cambridge theory

3. Keynesian theory.

Fisherian Theory: Value of money is determined by indirect demand. Value of money is determined by the interaction of supply and demand.

D = S [ In short term & equilibrium of money]

S is determined by MV

D is determined by TP

PT = MV [ M= Physical Money ; V= Velocity of money. ]

Is broadly PT = MV + M´V´

P = MV + M’V’/t

P = M + M’

When price level increases than purchasing capacity is determined and it decreases than other is increasing that Fisherian theory

Theory of Keyn’s

Value of money does not depend on the demand of money or supply of money. Value of money actually depends on the aggregate income and aggregate expenditures of the society. According to modern economists general price level (P) depends on total expenditure. If or any reason aggregate expenditure goes up and then price level may go up and vice versa. Again, aggregate expenditure depends on aggregate income. A decrease in income will lead to reduction in expenditure, which will in turn reduce the price level. On the other hand a rising in aggregate income will lead to an increase in aggregate expending and give rise to price level. At a certain period aggregate income of the society will be equal to aggregate expenditure.

That is Y = E

Again Y= C+S and Y- C = S

I = Y-C, in case of investment

So when both S and I can b derived from deducting consumption expenditure from national income, then there must be equity between savings and investment.

That is S = I

But, even if, real savings equals to real investment, yet desire investment always will not be equal to desire savings. This is because both the decision is not taken by same individual. The amount of savings depends on the propensity to income and propensity to save. On the other hand, investment depends on prospects of profit and loss. Under this circumstances there may be difference between plan savings and plan investment. Any decrease in plan investment or increase in propensity to save may lead to rise in rise level. On the other hand, if plan investment supersedes planned savings may lead to rise in level. So, change in aggregate income leads to change price level. Supply of money or demand for money has nothing to do in determining price level or value of money.