Classical Theory of Money

Classical Theory of Money Concept

Classical theory of money describes money as medium of exchanges and denies any real role of money in the economy i.e. impact or influence over income & employment.

1.    Medium of Exchange

Classical theory of money says money works as medium of exchange i.e. moneys is used to perform transaction. It means classical theory only recognize only transaction demand i.e. money is just needed to perform transactions.

2.    No Role in Economic Activity

Classical theory says that money has no role in generation of economic activity. Moreover money has no influence over the real factor of economy i.e. income, employment.

3.    Money is just facilitator

Classical theory of money says that money is just a facilitator in the market. It facilitates the transaction to be happen i.e. exchange of goods & services. Classical economist say money is like road which facilitates but does not create anything.

4.    No influence over Quality

Classical theory of money also denies money role in the quality of product. It means increase or decrease in price has no relevance with the quality, rather increase and decrease in prices relates to supply of money.

5.    Monetary Role

Classical theory recognizes monetary role of money i.e. impact on price & wage rate. It says that prices will increase with increased supply of money; similarly prices would decrease with decreased supply of money.