Chapter 6 complete

6.5 Liquidity Theory of Money 
Liquidity theory of money is looked upon as advanced theory over quantity theory of money 
and income theory of money. This theory has rejected both quantity theory and income 
theory of money. According to this theory, it is neither quantity of money in circulation nor 
national income determines the price level or general economic activity in an economy. On 
the contrary the theory looks upon general liquidity as the sole determinants of the price level 
or the economic activity in a country. 
To understand the general liquidity, we have to make a distinction between money 
and near money. The distinction between money and near money is based on the degree of 
liquidity. Money in a narrow sense is a means of payment, which serves as a medium of 
exchange, measure of value, a store of value, and a standard for deferred payments. It is the 
most liquid assets; it includes currency/cash (C) and demand deposits (withdrawable by 
cheques) of commercial banks (DD), as 
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