Q.In the Cambridge cash-balance approach, the money supply is ₹800 crore, the community wishes to hold one-fourth (k = 0.25) of its real income as cash, and real national income is ₹8,000 crore. Find the price level implied by M = kPY.

The Cambridge equation M = kPY can be solved for the price level as P = M / (kY), linking the money stock people hold to prices.

The Cambridge cash-balance equation is:

where $k$ is the fraction of real income held as money and $Y$ is real income. Given $M = 800$ crore, $k = 0.25$, and $Y = 8000$ crore, we must find $P$.

Step 1 — Rearrange for P.

Step 2 — Substitute the values.

$P = \frac{800}{0.25 \times 8000} = \frac{800}{2000} = 0.4$ …

Note the link to Fisher: since k ≈ 1/V, here k = 0.25 corresponds to a velocity V = 1/0.25 = 4. Substituting into MV = PY gives P = MV/Y = (800 × 4)/8000 = 3200/8000 = …

A frequent error is to multiply k, P and Y as if solving for M when P is actually the unknown. First identify the unknown, then rearrange: to isolate P, divide M by the product (kY). Also, k is a fraction — for …