Real Balances

Abstract

By the term ‘real balances’ is meant the real value of the money balances held by an individual or by the economy as a whole, as the case may be. The emphasis on real, as distinct from nominal, reflects the basic assumption that individuals are free of ‘money illusion’. It is a corresponding property of any well-specified demand function for money that its dependent variable is real balances. Indeed, Keynes in his Treatise on Money (Keynes 1930, vol. 1, p. 222) designated the variation on the Cambridge equation that he had presented in his A Tract on Monetary Reform (Keynes 1923, ch. 3: 1) as ‘The “Real-Balances” Quantity Equation’.

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