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Forms Of Affluence Possessions

 Forms of Affluence Possessions

Affluence can be held in five diverse forms: money, bonds, shares, physical goods and human capital. Each form of possession has a exclusive feature of its own and a diverse capitulate.

  1. Money is considered in the extensive sense to comprise currency, demand deposit and time deposits which capitulate interest on investments. Therefore, money is luxury good. It also capitulate real return in the form of expediency, safety etc to the holders which is evaluated in terms of the general level (P).
  1. Bonds are denoted as claim to a time stream of outgoings that are unchangeable in original units.
  1. Equities are denoted as a claim to a time stream of payments that a fixed in actual units.
  1. Physical goods or non-human goods are stocks of manufacturer and consumer durables.
  1. Human Capital is the productive capability of human beings.

Therefore, each form of affluence has a identical feature of its own and a diverse capitulate either unequivocally in the form of interest, dividends, labour earnings etc. or unreservedly in the form of services of money evaluated in terms of P and stocks.

The present discounted value of these expected earnings flows these five forms of wealth comprises the recent value of wealth that can be expressed as follows:

                                    W        =          y
                                                            r

where, W is the present value of aggregate affluence, y is the aggregate flow of anticipated earnings from the five forms of affluence and r is the interest rate. This equation presents that affluence is capitalised earnings.

Criticisms

Friedman’s reformulation of the volume thesis of money has suggested many disagreements and has led to pragmatic verification on the part of the Keynesian and the monetarists. Below are discussed some of the criticisms.

  1. Very Broad Definition

    Friedman has been criticised for utilising the extensive definition of money which not only comprises of currency and demand deposits (M1) but also time deposits with commercial banks (M2). This extensive explanation tends to the obvious conclusion that the interest elasticity of the demand for money is insignificant.

    If the rate of interest augments on time deposits, the demand for them (M2) raises. But the demand for currency and demand deposits (M1) drops. So the overall effect of the rate of interest will be insignificant on the demand for money. but Friedman’s scrutiny is weak in that he does not make a choice amidst long run and short run interest rates.

    Actually, if demand deposits (M1) are used a short run rate is choice-able while a long run rate is wiser with time deposits (M2). Such an interest rate structure is bound to over power the demand for money.

  1. Money not a Posh Commodity

    Friedman regards money as a posh commodity for the reason that the addition of time deposits in money. This depends on his findings that there is larger model rate of the money supply than earnings in the United States. But no such luxury effect has been found in the case of England.

  1. Money Supply is non-Exogenous

    Friedman takes the supply of finance to be unbalanced. The supply of money is varied from the monetary powers that be, in an exogenous type in Friedman’s system.

    But the reality is that in United States, the money supply comprises of bank investments generated by variations in bank lending. Bank lending in turn, depends on the bank reserve funds which enlarge and retrench with the following:

    1. Investments such as deposits and withdrawals of currency by non-banking financial sectors

    2. Borrowings by commercial banks from the Federal funds scheme

    3. Inflows and Outflows of funds from overseas and to overseas and

    4. Purchase and sale of securities by the Federal Fund Scheme.

    The prime three functions are particularly convey an endogenous constituent to the funds supply.

    Therefore, the funds supply is not absolutely exogenous as believed by Friedman. It is highly endogenous.

  1. Takes no notice of the Effect of Other Variables on Funds Supply

    Friedman takes no notice the effect of prices, productivity or interest rates on the money supply. But there is considerable pragmatic proof that the funds supply can be denoted as an operation of the above criterions.

  1. No Positive Correlation Amidst Funds Supply and Money GNP

    Funds supply and money GNP have been observed to be positively inter-related in Friedman’s findings. But as per Kaldor, the best inter-relationship is to be observed amidst the quarterly variations in the volume of funds held in the form of currencies and denominations by the populace and respective variations in personal consumption at market prices and not amidst money supply and GNP.

Conclusion

Inspite of these criticisms, Johnson defines –

“Friedman’s application to monetary theory of the basic principle of capital theory - that is the yield on capital and capital the present value of income - is probably the most important development in monetary theory since Keynes’ General Theory. Its theoretical significance lies in the conceptual integration of wealth and income as influences on behaviour.”

Source:  http://www.scribd.com/doc/48890676/Restatement-of-
quantity-theory-of-money

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