The Cambridge equation (Cash-balance equation) has been developed by Prof. A.C. pigou as follows:

P = KR /M

where represents the value of money, K stands for the proportion of total real income to be held in cash, R represent total real income, and M is the total quantity of money.

But all people do not hold cash strictly in the form of legal tender money. Some of them hold cash in the form of bank deposits also. It was with this view that the equation was enlarged as follows:

P = KR / M [c +h (1-c)]

M = KR / P [c + h (1-c)]

where c represents the portion of cash people hold in the form of legal tender money, (1-c) stands for the proportion of legal tender money which is kept in the form of bank deposits and h represents the proportion of cash reserves to deposits held by the bank. In the equation K, c and h are positive constants and are less than one but greater than zero i.e.,

0 < K < 1
0 < c < 1
0 < h < 1

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