Can anyone tell me the differences between cash balance approach and cash transaction approach in regard to the quantity theory of money?

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Traditional classical monetary theory (the theory of the amount of money and the equation of Cambridge)

Focused on the classical school analyzed the specific value of the money factor and the level of prices in some people try to shorten the causes of price volatility in the change of money supply, while others looked at that part of the money, who have dealt with individuals as income for them, and I have two theories have emerged to explain the value of money, namely the amount of money theory and income theory, he drew attention to the first hand the money supply, and the second focused on the demand for money, whether they are earned or spent.

And the classical model is based on the following assumptions:

· The all markets (goods and labor markets) dominated by full competition and the economy in full operation.

· Business owners are not subject nor the workers cash to deceive the sense that they base their decisions not on the basis of the absolute level of prices or on the basis of the money wage rate, but built their decisions based on the relative prices of goods and production, and when workers decide the amount of work they offer but is based this decision factors the real wage and not on the absolute level of cash remuneration.

· Full cash wages and commodity prices flexibility.

· Valid law guaranteed markets (supply creates demand for it).

· Automatically grow without state intervention in economic life (neutral state).

A quantitative theory of money: Irving Fisher Irving Fisher:

This theory has some assumptions, including:

· The demand for money is derived from the demand for goods and services and money demand function as a mediator in the exchange.

· Stability of the real size when fully operational level.

· The constant and independent money trading the amount of money circulating speed, as well as the real size of the swaps and are considered as independent variables slow change.

· Looking at the general level of prices as the dependent variable and is the result and not the cause of the change in other factors, and there is a direct correlation between the cash version and the price level, and this explains the classic rise in the general price level (inflation).

The content of the theory:

Promote the quantity of money theory based on a set of assumptions regarding the importance of changes in the amount of money relative to other factors in influencing the level of credit, it sees proponents of this theory in the amount of money the active agent and influential in determining the general level of prices and the proportionality between them is inversely proportional to, and take supporters this theoretical equation of exchange analytical tool to indicate their views as follows

MV = PT

M: the amount of money in circulation and paper money and coins to help and include current deposits.

V: speed of circulation (which is the average number of times the unit of currency passed from hand to hand).

P: general level of prices.

T: size exchanges.

And thus determine the equation all the factors that interact in a direct way in determining the level of prices and other economic equation called the equation of exchange Fisher also has appeared, where you enter your bank money in exchange, became the equation:

MV + M ¢ V ¢ = PT

M: Legal money.

V: speed of circulation.

M ¢: money banking.

V ¢: the speed of circulation.

The aim of the separation between the M and M ¢ until it is clear the importance of each one to achieve a certain level of exchanges and although this presentation does not change the bottom line, every change in the cash component of the elements to him only on the price effect, and so the neutral cash

So monetary policy at the Classic are neutral policy, whose role in the creation of money to carry out transactions, which means that the volume of transactions is determined by the amount of money that must be met.

Were directed to this theory, many of the criticisms include:

· Inadequate theoretical hypotheses in a lot of respects.

· Ignore the effects of interest rates on the general price level.

· Theory did not indicate the reasons for the changes in the value of money and the forces that govern it.

· Assuming that prices change depending on the amount of money supply and can not be changed as a result of other factors, and this is not true change, the prices change as a result of a failure causes of non-cash growing season.

· Attention to the function of an intermediary in the exchanges and the neglect of other functions.

Despite these criticisms, this theory but it is considered a valuable step, it has succeeded in focusing attention on some important college quantities that reflect economic activity, such as the amount of trade-offs, and the amount of money, it also paved the way for the study of other aspects of the economy that controls the behavior of the money and speed of circulation .

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