Classical view of Monetary Policy
Overview
Classical view of Monetary Policy
Classical view of Monetary Policy
ØClassical economist believed in the economics of value.
ØFor the classical economists, value meant value in exchange.
ØThe value of a commodity meant what it could be exchanged for or what it could buy. Value meant the purchasing power of a commodity.
ØSimilarly, the value of money means its purchasing power in terms of goods and services in general.
ØThe purchasing power of money obliviously depends on the prevalent price levels.
ØIf prices are high, money will buy less and its value will be low.
ØConversely, if the price level is low, the value of money is high.
ØThe value of money is thus inversely proportional to the price level or the value of money is the reciprocal of price level.