CLASSICAL MONETARY THEORY

Classical monetary theory is based on JB. Say, Irving Fisher and A. Marshall. J.B. Say's law has put forward is famous for stating that the supply will always create a demand (supply creates its own demand). This means that an economy will not experience underemployment or the disebet by Maltus underconsumtion. Total public spending will always be sufficient to support production at current state
Monetary theory of many associated with the quantity theory of money assumes that many factors affect the value of money is the money supply (quantity of money or the supply of money).
Quantity Theory of Recardo
Recardo is the person who originally found the theory of value for money by arguing that the strong and the weak value of money depends on the amount of money in circulation. If the amount of money turned into a 2-fold the amount of money will decrease and a half times the original, otherwise if the money is less by half, then the value of money will be doubled. It happens, because if the amount of money increased to 2 times then it will affect the price rose to two-fold and automatic the value will decrease by half.
This theory sebgai written with the following formula:
M = KP
Where:
M = kuantity of money
P = the general price level
The money supply is initially for OM, and the price level as high as op1. If the amount of money doubled (OM2) then the price rises were also two times (Op2) and the value of money fell by half.
Irving Fisher's Quantity Theory of
Irving Fisher tried to fix Ricardo's theory by including the three factors that mepengaruhi value for money. The theory of Irving Fisher was named "the transaction equation of exchange" which states that "Any payments by households, businesses, and governments on the other hand is a multiplication between price and quantity are the same as multiplying the amount of money in circulation and the speed of rotation". Mathematically, this relationship can be written
MV = PT
Where:
M = Quanti of money
V = velocity of circulation of money
P = price level
T = volume of good and services.
M x V shows the number of payments / expenditures are made public within a certain period. On the other hand it is payment for the purchase of goods and services (T), while T is to know the price (P), so the number of purchases declared
M x V = P x T.
From this formula can be determined the level of price and value for money, the price level equal to the amount of money multiplied by the speed of rotation divided by the number of goods traded:
P = MV / T is the value of money
W = 1 / P.
The fact indicates that the factor P is passive is not always true. Sometimes P may also play a decisive role in influencing the speed of the velocity of money. Thus between M, VP and T there is a relationship of mutual influence of affect. This fact may weaken the theory of Irving Fisher as a tool of monetary analysis.
Quantity Theory of D.H. Roberston
The quantity theory of Irving Fisher formulated back by DH Robertson becomes M = OPT. Actually both theories are the same, the difference lies in the approach. Irving Fisher reviewed the transaction through velocity (average velocity of money transactions). D.H. Robetson approached through cash balance (the average long idle money.) Therefore, the quantity theory of Robetson equaition is called cash balance., Factor V in the transaction velocity of approach by Robertson replaced by k in the cash balance approach. k that indicates how long on average each mengaggur dollars in cash is a reversal of the V which shows how many times each and every dollars change hands.
So k = 1 / V
and if the formula
M = KPT, we change k to 1 / V. then obtained by the formula;
M = TP / V or
MV = PT.
Quantity Theory of Marshall
What is the quantity theory in the face of more focused attention on the relationship between the amount of money with the price, then Mrshall notice a link between the amount of money to national income by the formula:
M = kY
Where:
M = Quanity of money
Y = income in cash bentuik
K = pendaoatan part of that is not spent and want controlled
in bnetuk money
Because the money was income derived from the amount of production multiplied by price
(PO), the Fisher formula can be written as
MV = PO = Y.
Marshall's theory is the beginning of the theory of demand for money. This theory is still very simple, it contains some weaknesses, these weaknesses and then enhanced by subsequent theory. The first drawback is that in reality is not fixed V, both in developed and developing countries. V tend to be constant. The second drawback is the classical theory ignores the influence of the interest rate on perimtaan money. The quantity theory of money assumes that the demand for cash is not affected by interest rate (because the main motive for holding money is for the transaction, the amount depending on income.