Indian Journal of Economics October 1943

This rate of increase in the index number of note circulation was roughly twice that of prices in the first half of 1941 three times in the second half of 1941 twice in the first half of 1942 and roughly the same in the second half of 1942 and the 'first half of 1943. [...] An indirect measure of the confidence of the people in the money and hence of velocity of circulation is provided by the movement of the total real value of the 8 The equation of exchange and the cash balance equation of Marshall and the Cambridge economists would yield the same result in the study undertaken here. [...] The k of the cash balances equation the proportion of total income which the people choose to hold in cash is the reciprocal of V in the equation of exchange when V is conceived as income velocity the number of times a unit of money becomes icome in a unit of time rather than as transactions velocity the number of times a unit of money changes hands in making transactions per unit of time. [...] In the new sitution it is the gross rate of interest which is raised; the net rate of interest remains unchanged. If OM (on the X-axis) represents the quantity of money and (on the Y-axis) the rate of interest corresponing to the liquidity preference curve Li (sloping down from left to right) the reduction in net income on acount of the tax will shift the liquidity preference curve to t [...] The above analysis of the effect of income-tax on the rate of interest must not be taken to mean that immediatly following the enhancement of the rate of income-tax by the Chancellor of the Exchequer there is a rise in money rates.