7. Explains Trade Cycles:

Hansen regards к in the Cambridge equation superior to V in Fisher’s equation for understanding cyclical fluctuations. According to him, “Drastic and sudden shifts in the desire to hold money, reflected in a change in k, may produce large and quickly moving changes in the level of income and prices. Shifts in the public psychology, in expectations must be taken into account not less than changes in the money supply. In the Cambridge analysis, a shift in к may start an upward or downward movement.” For instance, when к (the fraction of total real income that people wish to hold in cash balances) increases because of low business expectation, the price level falls, and vice versa.