Chapter 6 complete

S
a
v
in
g
, 
In
v
e
st
m
e
n
t 
(S
, 
I)
 
Income (Y)
Figure 6.2: Saving-Investment Approach to the Price level
Investment (I)
E
Y1
Y2
Y3
S>I
S < I
E1
E2

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M = C + DD
6.40 
Where, M refers to money; C refers to currency; and DD represents demand deposits of 
commercial banks, which is withdrawable by cheques. 
The narrow concept of money is called money assets (referring to assets, which 
functions as money). According to broad concept of money, 
Money = Money assets + Near money assets (referring to assets, which can be 
converted into money on a short notice like fixed money. Near money comprise all those 
assets held by the public, which are not directly used by the public as a means of payment, 
but are looked upon as a near substitute of money. For example, time and saving deposits of 
commercial banks, government security, treasury bills, bills of exchange, traveller’s cheques, 
post-office national saving certificate, debentures, surrender value of life insurance policies, 
and units issued by the Unit Trust and various other credit instruments customarily used in 
the money market. 
According to this theory, it is non-banking financial intermediaries, which provide a 
link between liquidity and monetary policy. This theory states that aggregate public 
expenditure particularly in advanced country is not only affected by currency and demand 
deposits of commercial banks but also by near money as well. Near money play an important 
role in determining expenditure of the public. It is on account of this that the liquidity theory 
of money accords an important status to near money as a determinant of the price level in a 
country. Hence, it is suggested by the modern economists that central bank should control 
both commercial banks as well as non-banking financial intermediaries. There are two 
versions of liquidity theory of money: (i) Radcliffe-Sayers’ version of the liquidity theory, 
and (ii) Gurley-Shaw version of the liquidity theory.