University of Karachi Department of Economics

Chapter 3
Money

INTRODUCTION
Money has always been captivating for everyone. Individuals have different needs and to meet those needs,
we require some goods and service. However, we cannot produce all goods and services needed by
ourselves. To overcome this constraint, exchange of goods and services with one and others directly, can
take place which was known as “barter system”. However, with passage of time and increase in needed
transactions, barter system became inconvenient. A medium of exchange or alternate system, acceptable
for all members in the economy, was required. For this purpose, various goods from wheat, tobacco, salt,
bone, stones, beads, gold, silver and leather etc., has been used

Barter System
‘Barter is the exchange of one economic good or service for another’. There was a time when life was
simple and people have limited wants. But with the passage of time, man’s needs begin to increase and a
shift in life from self-sufficiency to dependency upon others begin. Meeting the increased demand,
instigated direct exchange of goods and services with others. Although, this system is still working in
typical rural areas of underdeveloped countries, however, there are a number of serious disadvantages that
resulted in pursuit of alternate system for exchange of goods and services. These disadvantages are
discussed below:

 Coincidence of wants: Fundamental condition for barter system to take place is the existence of
‘coincidence of wants’. It refers to a situation where both parties (buyers and sellers) are able to offer
something which is acceptable for each of them simultaneously.
For Example: Suppose one is carrying rice and looking for some amount of cotton. Transaction will not
take place until he will not come to a person with cotton and looking for some amount of rice. Finding
appropriate exchange partners can involve a tiring and time consuming activity which causes to slow down
the economic activities.

 Rate of exchange: An agreed ‘rate of exchange’ must prevail among parties to exchange their products.
It is not an easy task to find a rate of exchange which is acceptable for everyone at the same time.
For Example: How you can convince someone to give up a face mask in exchange of bread and then
exchange of apple and so on? How we can measure of the value of one dozen eggs in terms of apples and
then in term of rice and then in terms of smart phone etc.? Determination of an appropriate price of a face
mask in terms of different goods is merely impossible.

 Indivisibility of goods: Most of the goods are indivisible and by dividing they become useless. Like
chair, table, pen, door etc. This is another obstacle in working of barter system.
For Example: Suppose you have a chair and wish to get few eggs. Your exchange partner can easily share
his eggs but you cannot share some part of the chair.

Sir Saad Bashir

University of Karachi Department of Economics

 Store of value: In barter system storing of wealth in form of perishable goods was impossible.
For Example: Suppose a farmer grows sugarcane to exchange different goods and services of his need. He
grows surplus sugarcane with intentions of storing for his old age which is not possible. This product is
perishable.

 Transfer of wealth: In absence of money the transfer of wealth was another serious issue. Most of the
goods are immoveable like house and agriculture land etc.
For Example: If you have one-acre agriculture land in Faisalabad and you are planning to shift to Karachi.
In absence of money you cannot shift your piece of land.

 Difficulties in Tax collection: Government collects taxes and spent it on different development and non-
development projects. In absence of money, if tax is collected in form of goods, it is not possible to spend
it on development projects.
For Example: Suppose wheat is being used as a medium of goods. Certainly government will receive taxes
in form of wheat, which in turn cannot be used to construct a road or build a hospital or university. Keeping
in view the above mentioned inconveniences of barter system, people started looking for some alternative
system, which can overcome these issues.

MONEY
Anything that can be used to pay for goods and service or accepted as reward against factors of production
is referred to as money. Historically, the modern money has evolved through various stages and forms. In
older time during transactions people have used various things such as, animal bones, stones, metals,
tobacco etc. With the passage of time problems begin to rise regarding different goods which were being
used as a medium of exchange.
According to Prof. Crowther; “Money may be defined as anything that is generally acceptable as a means
of exchange and at the same time acts as a measure and a store of value”.

Functions of money
The problems that come with bartering have led to the evolution of money in its current form.
There are four functions that money undertakes in modern society

 To act as a medium of exchange: Allowing economic agents to exchange goods without the need to
barter.

 To act as a unit of account: Allowing people to compare relative price of goods and services through a
common denomination.

 To act as a store of value: Allowing people to forgo immediate consumption, if they have a surplus of
resources, and to retrieve it at a later date in order to consume.

 To act as a standard of deferred payments: Allowing people to consume goods and services in a current
time period, whilst continuing to pay in future periods.

Sir Saad Bashir

University of Karachi Department of Economics

Difference of Opinion
Money plays such an important role in the economy that it is inevitable, as with other areas of the subject,
that there is debate around its characteristics and how it should be used to meet policy goals.
Below are some differing views of what role money plays in the macroeconomy.

 Classical economists: Classical economists are characterised by their faith in markets to balance out the
forces of supply and demand. For them, money acts as a lubricant to allow a smoother interaction between
buyers and sellers in a marketplace. According to classical economists, money plays a passive role in
economy.

 Keynesian economists: For Keynesians, in addition to providing smooth trade of goods in an economy,
money also has another role: it acts as a store of value. In other words, money can be used to facilitate
transactions, money can be used to purchase goods and services in the future. This goes against the classical
view of the neutrality of money.

 Monetarists: Monetarists are a branch of new classical economists. They believe that aggregate
expenditures in the economy are influenced by the market rate of interest, and therefore, money can affect
the level of output in the short run economy
However, they further believe that money influences the long run unemployment in the economy. If
monetary policies are used to increase aggregate demand, it is thought that this use of additional money
may cause a short term boost in output, but will ultimately lead to inflation in the economy.
Conclusion
These are the three core views on the role of money within an economy. The Keynesian and Monetarist
theories will be discussed at greater length in subsequent sections of this chapter. Where possible, it is
important to consider the different outlooks on money as we progress through the reading.

Evolutionary Stages of Money

Evolution of money is one the biggest contribution in human history. Historically, we see that money is not
an overnight invention, but it evolved with the passage of time. People kept on using different tools in
exchange of different goods and services according to need of the time. Changing requirements of the
economy kept on dragging people to search for the most convenient medium of exchange.
Evolution of money generally passed through following stages:

 Commodity Money: Money was introduced to remove inconveniences of barter system. ‘Coincidence
of wants’ dragged people to some standard commodities which can be used during frequent transitions. In
the beginning of civilization, different goods such as animals, stones, bones, tobacco, arrows etc., were used
as medium of exchange. However, due to inconveniences like, store of value, measure of value and limited
or immobility of wealth, trade remained restricted and led to search for alternate ways.

 Metallic Money: Any metal which is used as medium of exchange during economic transactions is
termed as metallic money. In the beginning of civilization, precious metals such as gold and silver, were
used as money as these metals were widely acceptable. Though these metals solved problems being faced
in the barter system to some extent, but it did not facilitate in reducing the competition involved completely.
Later, according to the requirement, these precious metals were converted into standardized coins, which
have a specific weight and shape (minting of coins).

Sir Saad Bashir

University of Karachi Department of Economics

There were TWO types of metallic money:

o Full bodied money: It refers to that form of money in which the intrinsic value (value of the metal used
in that coin) is equal to the face value (value printed on coin).
o Token money: It refers to that form of money in which the intrinsic value is less than its face value.

Paper Money: Although metallic money served well as medium of exchange, but there were several
problems attached to its use. These issues included for example mining of precious metals, transferring of
heavy metallic coins and so on. Keeping in view these difficulties associated with metallic money, paper
money was introduced. Paper age begins with a simple system in which people started accepting receipts
issued by gold smith (rich and reliable men with repute in the town) during their economic transactions.
However, gradually people started facing difficulties with this informal system, and central bank removed
these difficulties by taking over the power of issuance of paper money. Now all over the world countries
are using this system.
There are TWO main kinds of paper money:
o Convertible: The government promises to change this currency into gold if demanded.
o Inconvertible: Against such money the government has no promise to give gold if demanded.
Advantages of Paper Money
o It does not require precious metals. Furthermore, the printing of currency notes is simple and cheaper
than minting coins.
o It helps government to increase money supply to finance its development projects without imposing new
taxes.
o Paper money is easy to transfer as compared to metallic money.
Disadvantages of Paper Money
o Danger of inflation is a serious threat of paper money. Their as a high probability of over issuance of
currency notes as no metallic requirement are attached with it.
o While making international payments, money has limited acceptability. It is usually accepted within the
domestic boundaries of a country.
o Paper money has limited age than coins, as it can be torn or burned.

 Fiat Money Fiat money has no intrinsic value. Fiat money is a government-issued currency that is not
backed by a commodity. For Example, currency issued by government as legal tender paper money.

 Credit Money: Any monetary claim against physical or legal person is that it can be used for the purchase
of goods and services. This can include a simple verbal, or written agreement, and any other financial
instruments that are not immediately payable such as bonds. There are many cases where people wish to
spend money before they have it. Credit money facilitates these transactions, based on a trust between these
parties that the money will be repaid.

Sir Saad Bashir

University of Karachi Department of Economics

Advantages of credit money

o Allows immediate consumption of expensive goods, based on future earnings (this includes houses,
education, cars, which could otherwise not be bought).
o Allows firms to invest, expand and generate future revenue, rather than using retained earnings.
o Government can also increase its spending by issuing bonds which is a type of credit.
Disadvantages of credit money
o There is often an element of risk involved that the person issuing credit may not receive full payment
from the person receiving credit.
o It may not be possible to establish trust between parties.
o Credit may also cause of inflation.

 Electronic or Digital Money: Use of internet and on-line transactions for buying or selling of goods and
transfer of funds through debit or credit cards is called electronic money. Banks can store monetary value
on technical device that may be widely used for making payments with holding or carrying cash. It further
helps in long distance payment within moments.

Characteristic of Good Money

The form which money has taken over time, has distinct functions, but there are also a number of shared
characteristics. These characteristics have persisted over time and are continued in its current forms of
money well.

 General Acceptability: People will prefer money only it is accepted in exchange of their goods and
services and if they are certain that it would be acceptable when they need to pay it somewhere else.

 Stability: One of the most important characteristics that a good money should possess stability. If value
of money will be unstable, then it cannot perform its function as a measure of value and especially as a
standard of deferred payments. This is because people cannot trust while lending or accepting their payment
in future as its value would be ambiguous.

 Durability: It retains the same shape and substance over an extended period of time. It will not deteriorate
nor degrade over time. It is not confined to just physical durability. If issued by the government, it must be
assumed that the government too will be durable, for the paper that they issued to have value.

 Divisibility: Money can be divided into small increments to facilitate exchange of a variety of goods.
Historically, precious metals have been used as money as they can be easily divided.

 Transportability: In its current paper form, money can be easily transported between locations, however,
if money took the form of concrete blocks, then moving it to a market would be problematic. Precious
metals have historically been fairly transportable, however it could still not been as mobile as paper.

 Non-counterfeitability: Money is not easily duplicated. It will fail as a medium of exchange if people
can create their own easily. Preventing the duplication of money is a task that the government must oversee
to ensure that the functions of money remain intact. To ward off counterfeiting, a government will employ
a number of measures (such as watermarking) to make the process of duplication more difficult

Sir Saad Bashir

University of Karachi Department of Economics

DEMAND FOR MONEY (MD)

Although apparent structure of demand for money is similar to conventional demand we have discussed in
microeconomics, but there are some differentiated features. We will discuss, in this section, how people
choose whether to hold wealth either in form of money or in form of other assets. Such decisions depend
upon the relative cost and benefit of holding cash or an asset. In this section, we will discuss demand for
money and its role in determining rate of interest.
‘All else equal, demand for money is the amount of money which people wish to hold at a given time at
different rates of interest’.
In other words, demand for money is the desired amount of holding financial assets in form of cash or bank
deposit (rather than making investment).
In Nutshell, demand for money is the desire to holding cash or liquid assets.

Determinants of Demand for Money

There are several factors that determine demand for money in an economy. These are given here in brief.

 The level of interest rates: Interest is the opportunity cost of holding liquid assets. Rather holding cash
one can earn handsome amount of interest by lending it to someone else. Higher interest rate decreases the
demand for money and vice versa.
For Example: Suppose Mr. Zain has Rs. 1,000,000. If rate of interest increases from 10% to 20%, he will
prefer to lend it to get more return as opportunity cost of holding cash has increased.

 Price Level: Depending upon their income level people plan to hold a fixed amount of money to maintain
their living standards. Change in price level (inflation rate) will force people to rethink about holding cash.
For Example: Assuming 10% increase in price level in a given time meant 10% fall in purchasing power
of the people. Suppose you were spending Rs. 100 on bread slice and butter, now you need to hold Rs. 110
for same meal.

 The level of real national output (GDP): Demand for money also depends upon the level of real GDP.
People with higher income have high level of spending as compared to those with low income.
For Example: If you have annual income of Rs. 600,000 and you might go for a leisure trip once a month.
As your income goes up you must incline for leisure trip may be on weekly basis. Hence your demand for
money will increase.

 The pace of financial innovation: Financial innovation such as, online funds transfer facilities, automatic
teller machines (ATMs), credit cards etc., also influence level of money needed. People with these modern
financial facilities will be less inclined to hold money.
For Example: In the absence of such modern means of funds handling, people prefer to hold money as to
meet any immediate need. Suppose during bank holidays you need to make some urgent payments, by using
modern financial system you can make it possible any time. Hence you do not need to hold money next.

Demand Schedule and Demand Curve

From above discussion we have learnt that with all else equal the demand for money is inversely proportion
to rate of interest. Following table and diagram will help us to understand this relationship more clearly

Sir Saad Bashir

University of Karachi Department of Economics

Above table represents the impact of a fall in interest rate on demand for money. Demand for money
increases, as people feel less attracted towards lending or depositing it. In figure negatively sloped demand
curve represents an inverse relationship between demand for money and market rate of interest.

Shift in Demand Curve (Factors Affecting Other than Rate Of Interest)

Demand curve will shift if any of the factors other than rate of interest will change. Factors such as financial
innovations, change in income, change in price level etc., will cause a shift in demand curve.

Sir Saad Bashir

University of Karachi Department of Economics

In the graph above, original demand was MDo. Due to any change i.e., rise in income level or fall in price
level, demand for money increases causing a shift in demand curve to right MD1. Conversely, demand
curve can shift inward to MD2.
Money demanded and an increase in GDP: Suppose that economic growth increases in the economy.
Consequently, real incomes increase as well as the number of people employed in the economy. This will
cause an increase in the demand for money at each level of interest rate. Consequently, there is an outward
shift in the demand for money.

Money demanded and an increase in financial innovation: Financial innovation is a loose term that, on
the whole, incorporates a new means of spending money. In recent years, a major innovation has been the
rise of financial products, such as credit cards and debit cards, which reduce the need for people to withdraw

Sir Saad Bashir

University of Karachi Department of Economics

cash in order to purchase goods and services. Consequently, financial innovation has reduced the demand
for cash balances at each level of interest rate.

KEYNESIAN LIQUIDITY PREFERENCE MODEL

Elaborating on earlier points about money, Keynesians believe that demand for money depends upon
someone’s liquidity preference.
The idea that, all else equal, people prefer to hold cash (liquidity) rather than assets that are illiquid. They
will, however, be paid a premium to hold more illiquid assets.
This makes intuitive sense. If a friend asked you for Rs.1,000 and said that he would pay it back tomorrow
then, if you trusted them, you may be happy to lend it to them. If they said that they would pay you back in
one year, then this increases the risk that they will not be able to do so. Therefore, to compensate you against
the risk of it not being paid back, you might ask for a “premium” (i.e. more than your Rs.1,000) when they
pay it back.
It is the Keynesian view that there are three motives (reasons) for demand for money:

 Transactional Motives: People need money to make regular payment for their day to day transactions.
This is the amount which people hold for their prescribed expenditures. This demand for money is directly
proportion to nominal national income.
Note: Transactional demand for money remains unaffected to any change in rate of interest.

 Precautionary Motives: The money people hold for emergency purchases. It shares a nominal part in
total demand for money which people hold for some unexpected events such as, accident or disease etc.
Note: Precautionary demand for money is inversely related to market rate of interest but relatively inelastic.

 Speculative Motives: Another important aspect of demand for money is that people want to make more
money with their existing money stock. At low interest rate opportunity cost of holding money decreases.
Hence, people hold more money with intensions of investing them into some business purpose such as,

Sir Saad Bashir

University of Karachi Department of Economics

stocks etc. Note: Speculative demand for money is also inversely related to the interest rate but relatively
elastic. Keynes assumed that wealth could be stored either in cash or bonds, and that the price of a bond is
inversely related to the interest rate

Liquidity Trap
Liquidity trap is a situation where prevailing interest rates are low and saving rates are high, causing
monetary policy to be ineffective.”
Liquidity trap refers to that situation of an economy where interest is as lower (called critical rate of interest)
that any effort to decrease in interest by increasing money supply becomes useless. According to Keynes
Liquidity Trap, people wait for good time for purchasing bonds. They prefer to hold liquid money (cash
balances) which makes monetary policy ineffective.

Measure to Overcome the Liquidity Trap

A number of policies can help to break out of the liquidity trap:

 Fiscal policy: becomes a very important instrument in raising demand, for example running a larger
budget deficit.

 Rising inflation expectations: higher inflation will cause savings to be worth less. This will be a
disincentive for hoarding of cash, as its real value will decrease. Therefore, consumption will increase.

 Expectations of increase in rate of interest: If government. borrows from commercial banks, so as

market rate of interest increases. As a result, individuals starts purchasing bonds and with this inflow of
resources into financial system, economy will slowly pull out from the liquidity trap.

Bond
An investment that is bought up front by an investor, and which then pays a fixed amount in return at regular
time periods (usually annually).
Bond price = 1 / rate of interest
This can be explained better through an example:
For Example:

Sir Saad Bashir

University of Karachi Department of Economics

Suppose a bond is issued for Rs.4,000, and its annual return is Rs.400. This means the annual rate of interest
is 10%. If the market interest rate falls to 5%, then the price of the bond will increase to Rs.8,000. This is
because, in order to maintain an annual return of Rs.400, Rs.8,000 would need to be invested in another
asset.
This means that as the interest rate falls, the price of bonds increases. Therefore, there is an inverse
relationship between interest rates and the market price of fixed government securities.
Keynes believed that each individual had their opinion on what was the “average” rate of interest. If the
market interest rate was above the average rate, then it would be rational to expect it to fall, and vice versa.
When interest rates are high, individuals would expect the rate of interest to fall, and the price of bonds to
rise. Therefore, to speculatively benefit from this, they should use their balance of money to buy bonds
(because if/when the price of bonds rises, they can sell them and make more money). The speculative money
balance is low when interest rates are high.
When interest rates are low, individuals would expect the rate of interest to rise, and the price of bonds to
fall. Therefore, to avoid the losses involved with a fall in the price of bonds, individuals would sell their
bonds, thus increasing the balance of speculative cash. In short, there is an inverse relationship between the
rate of interest, and the speculative demand for money.

SUPPLY OF MONEY (MS)

After having a detailed discussion of demand for money, now we will move to another significant concept
i.e., supply of money.
Supply of money refers to total stock of money in circulation in a country at a given time. It includes
currency notes, currency coins, banks demand deposits etc. Supply of money is quite different concept from
supply of goods. As in case of goods, supply of goods once gone into someone hands may be consumed
and abolished permanently. Whereas in case of supply of money even it is used as many times, it remains
in total stock of money supplied in a country.
The central authorities in many countries have adopted a scaled system for the categorisation of different
types of money:

 Transactional money (M0): It is used to buy and sell things within an economy.
It includes currency note and coins.

 Checking accounts (M1): Money that is in peoples’ accounts that they have immediate access too.
M1 = M0 + Demand Deposits

 Savings deposits (M2): Money that belongs to people, but which they cannot access immediately
M2 = M1 +Time Deposits

 Large time assets (M3): such as Mutual funds and securities

M3 = M2 + Long term securities

Sir Saad Bashir

University of Karachi Department of Economics

The key variable amongst these different sources of money is their level of liquidity. We see that the types
of money here are categorised by their liquidity, with large time assets being the most illiquid, and
transactional money, by its nature, already being fully liquid.
One of the most important points to understand is that to hold any value, the supply of money must be finite.
If the currency could be produced to an unlimited extent, then people could use it to bid up the price of all
goods in the economy, meaning prices and incomes would be sky-high. Consequently, power over the
money supply is left with the government.

Importance of Money Supply

The reason that money supply is important is that money is intertwined with almost all aspects of daily life.
An increase in money supply has the effect of lowering the interest rate at which people can borrow, hence
directly affecting the level of investment of and consumption within an economy.

Methods of Controlling The Money Supply

There are various means by which the government can attempt to control the money supply.

 Open market operations: This involves a central bank buying and selling bills on behalf of the
government on the open market. This affects the credit-creating abilities of the commercial banks. For
example, if the central bank sells bills, the public will pay for them by drawing on their accounts with the
commercial banks. As these banks have to maintain a stable ratio between cash and loans, they will have
to cut back on their lending and hence the growth of the money supply will be curtailed.

 Interest rates: A government, through a central bank can influence interest rates through the issue of
Treasury Bills which results in all major financial institutions altering their rates accordingly. If the
government raises interest rates, this reduces the demand for money as less people will want to take out
bank loans, thus less money is created.

 Special deposits: A government can require commercial banks to deposit a certain proportion of their
assets at the central bank. This effectively reduces their ability to create credit and thus would support a
contractionary monetary policy.
Government borrowing: The government can influence the money supply with the level of its own
borrowing:
o Higher borrowing by the government reduces the money supply;
o Lower borrowing by the government increases the money supply.

Determination of Interest Rate

Demand for money and supply of money forces play a vital role in determining market rate of interest.
Keynes assumed that at any given time the supply of money remains unchanged since the central bank or
federal authorities can change it.

Sir Saad Bashir

University of Karachi Department of Economics

In the graph above, vertical supply curve of money represents a fixed money supply and downward sloping
demand curve represents an inverse relationship with interest rate. At point E both are intersecting each
other which determines interest rate at r.

Change in supply of money

Suppose prevailing inflation rates are high, and government wishes to drag it down. To control rising
inflation government will try to control supply of money. With this purpose plan of central bank will be:
Government will try to increase interest rate to shrink consumption and investment in the country,

 Central bank will sell securities in open market

 Doing so, bank reserves will decline
 Commercial banks have less lending power
 Overall money supply will fall
 And interest rate will be high

Conversely in deflationary situation, where prevailing prices are too low and investors have no incentive to
invest. Government will try to reduce interest rates. For this purpose, government will buy securities from
open market and so on.
Change in Supply of Money and impact on market rate of interest
Process of changing interest rate due to different policies adopted by central bank is given below:

Sir Saad Bashir

University of Karachi Department of Economics

In the graph, due to increase in money supply the MS shift to MS1 which lowering the interest rate to r1.
While a decrease in money supply shift MS to MS2 which cause an increase in interest rate to r2

VALUE OF MONEY
According to Walker, “Money is what money does”.
People need money not for the sake of money, but, to buy goods of services to satisfy their desires. In
modern world money has a crucial role where it is being used as a medium of exchange during economic
transactions. Value of money refers to the purchasing power of money. The main determinant of value of
money is ‘price level’. As discussed earlier, people spend money to buy goods and services they need and
they can purchase more of goods as price decrease and vice versa.
In simple words, we can say that price level and value of money are inversely related.
Thus,
value of money = 1/2 P (where ‘p’ is general price level).
Now we will investigate that if ‘price level’ determines the value of money, then what determine the price
level”. Different theories are presented to address this question. Here we will present one of the famous
theories.

Quantity Theory of Money (QTM)

An eminent economist “Irving Fisher”, in his theory presented in 1911, stated a direct relationship between
supply of money and price level. As supply of money increases, price level also changes in same direction
and vice versa.
‘Quantity Theory of Money states that Velocity of money (V) and total goods and services (T) remaining
unchanged, changes quantity of money supplied cause direct and proportional change in price level’

Sir Saad Bashir

University of Karachi Department of Economics

Mathematically,
MV=PT.

Where,

M represents, Quantity of Money Supplied

P stands for price level
V refers to velocity of money (rate at which money is exchanged in an economy in a given time)
T represents, total goods and services (some economists have used Q instead T)

For Example:

Suppose, in a given condition of an economy;

M = 100 (Rs. billions)

V = 10
P = 20
T = 50 (million units)

Keeping V and T constant, if M becomes twice i.e 200, then the price level will be calculated as follows:

𝐌𝐕 = 𝐏𝐓
P = 𝐌𝐕/𝐓
P = 𝟐𝟎𝟎𝐱𝟏𝟎/𝟓𝟎
P = 𝟒0

Hence, as we double the money supply (M), price level is doubled which means that value of money has
fallen to one half.

Calculation of Velocity

V = GDP / Supply of Money

Assumption:

Quantity theory of money assumes that:

 Velocity of money remains constant.

 Amount of goods and services remain unchanged.
 Money is required to spend on goods and services.
 ‘P’ is a passive factor which is affected by other factors.
 Full employment has reached in economy.

Criticism

 This theory requires full employment, which doubts its reliability in real world.

Sir Saad Bashir

University of Karachi Department of Economics

 Change in price level and money supply is not necessarily proportional to one another.
 Money as a medium of exchange is considered while other functions, store of value and unit of account
are ignored.
 It is a simple theoretical model which has limited practical ability.
 Assumptions are weak

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