Question

Sequence the evolution of money demand theories oldest to latest: A. Friedman's Restatement of quantity theory, B. Inventory theory of transactions demand, C. Cambridge Cash Balance approach, D. Liquidity Preference theory, E. Portfolio Balance Model.

• A. B, A, C, E, D
• B. A, B, C, D, E
• C. D, C, A, B, E
• D. C, D, B, E, A

Hint:

Money demand theory moves from Cambridge cash balance to Keynesian liquidity preference and then to modern portfolio and Friedman approaches.

Answer 1

The Correct Option is D

Concept: Theories of money demand developed from classical and Cambridge approaches to Keynesian liquidity preference and later modern portfolio and quantity theory restatements.

Step 1: Start with Cambridge Cash Balance approach.
Cambridge approach is one of the earlier theories of money demand. \[ C = \text{Cambridge Cash Balance approach} \]

Step 2: Then Liquidity Preference theory.
Keynes developed liquidity preference theory to explain demand for money. \[ D = \text{Liquidity Preference theory} \]

Step 3: Then Inventory theory of transactions demand.
Inventory approach explains money demand using inventory management logic. \[ B = \text{Inventory theory} \]

Step 4: Then Portfolio Balance Model.
Portfolio balance approach treats money as one asset among many assets. \[ E = \text{Portfolio Balance Model} \]

Step 5: Then Friedman's restatement.
Friedman restated the quantity theory in modern form. \[ A = \text{Friedman's Restatement} \] Therefore, the correct order is: \[ C, D, B, E, A \]