Cambridge equation

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The formulation of the quantity theory of money as M = kPY. Here M is the demand for money balances, P is the price level, Y is the level of real national income, and k is a parameter reflecting economic structure and monetary habits, namely the ratio of total transactions to income and the ratio of desired money balances to total transactions. The Cambridge equation is a modified form of the quantity equation, MV = PT, with k = T/(VY), where V is the velocity of circulation and T is the real volume of transactions.

Subjects: Economics.

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