Literature Review On Quantity Theory Of Money

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Chapter 2: Literature Review
2.0 Introduction
In this chapter, explains the relevant theories for the research. On the other hand, investigate the effects of how the independent variables affect the dependent variable. In addition, this chapter also includes a proposed conceptual framework, theoretical models and hypothesis development.

2.1 Review of the Literature
2.1.1 Dependent Variable - Return on Assets (ROA)
Return on assets (ROA) is to measure the value of company’s total assets to indicate company’s profitability. ROA also gives an idea as to how efficient management is at using its assets to generate earnings.
Formula of ROA: (Investopedia, 2017)
ROA = Net Income / Total Assets x 100%
Assets are either financed by equity or debt.
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In accordance to this theory, the purpose of money is only for settling payments for current transactions.
MV = PT …………………………………………………………… (i)
M = money supply
V = Velocity of Circulation
P = Average Price Level
T = Volume of Transactions of Goods and Services
Both MV and PT are identical to each other and it also measure the total value of the transactions within the period. In other words, the value of goods sold is equal to the total amount of money paid.

Keynesian Theory of Money (Keynes, 1935)
Retaining cash-in-hand is important, according to “The General Theory of Employment, Interest and Money”. Cash is held for several reasons, such as speculative motive, precautionary motive and transaction motive.
Speculative motive:
In order to make good use of beneficial exchange rate fluctuations and bargain purchase, cash is withheld at an appropriate level.
Precautionary motive:
It is necessary to maintain a safety level of cash which acts as financial reserve when a company goes into liquidation.
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