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The New Understanding of Keynes’ and Fisher’s Theory

  • Date Submitted: 01/28/2010 12:01 AM
  • Flesch-Kincaid Score: 47.2 
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Keynes’ three psychological factors affecting the money demand have been accepted by all for many years. Under the current economic situation, I have some new understanding about several points of his theory and about Fisher’s quantity theory of money.

First, I’d like to state some assumptions about my analysis. While we talk about money demand, we always emphasize the desire to obtain the money and the ability to get it, that is , we tend to define the nature of money demand, however, the range of money demand has not been mentioned, that range plays a great part in the analysis and understanding of money demand. We all know that the demand and supply of money are closely connected, and the money supply has its definition and range, so I choose money supply as the base of my analysis of demand. However, it doesn’t mean that money supply decide the quantity of demand.


Different countries and financial systems have varied definition of the range of money supply. When some countries choose M1 (the amount of money in circulation in notes, coin, current accounts, and deposit accounts transferable by cheque), some choose M2 (M1 plus savings account and fixed deposit), and others choose M3, even M4 (M2 plus holdings of money-market instruments of financial or non-financial organizations, such as bonds and stocks) as their supply of money . Considering the different definitions of money supply, together with the theories of Keynes and Fisher, I want to analyze some points in detail.

In the analysis of economics, the output is equal to the income (including salary, interest and rent). According to Fisher’s theory? MV=PT, the right side of the equation: PT can be considered the output under the current price. In fact, the output is also the income, and income is definitely connected with people’s demand of money. There is logic in it. People’s income has several uses, and generally they can be classified into two parts: 1....


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