What does money demand depend on?
Generally, the nominal demand for money increases with the level of nominal output (price level times real output) and decreases with the nominal interest rate. The real demand for money is defined as the nominal amount of money demanded divided by the price level.
The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future.
The speculative demand for money is based on expectations about bond prices. All other things unchanged, if people expect bond prices to fall, they will increase their demand for money. If they expect bond prices to rise, they will reduce their demand for money.
The higher the interest rate, the lower the quantities of money demanded for transactions, for precautionary, and for speculative purposes. The lower the interest rate, the higher the quantities of money demanded for these purposes.
The transactions demand for money is positively affected by the amount of real income and expenditure, and negatively affected by the interest rate on alternative assets, which is the opportunity cost of holding money for any reason. It also depends on the timing of expenditures and the length of the payment period.
The demand for money depends negatively on the interest rate. Ex: An increase in the interest rate decreases the demand for money, as people put more of their wealth into bonds. Relationships between money demand, interest rate, and nominal income: 1.
Other factors that shift demand curves. Income is not the only factor that causes a shift in demand. Other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations.
If real rate of interest is increases in the economy then it will decrease the real income with the people as a result of which purchasing power would be decreased which will decrease the demand for money in the economy.
The level of income, interest rates, and inflation, in addition to an individual's uncertainty regarding the future, are all elements that impact a person's desire for money. For example, speculative demand for money will be reduced if there is an expectation that interest rates will continue to climb.
The speculative demand for money is inversely related to the interest rate. When interest rate on securities is very high then people expect interest rates to fall in future. This implies that in future bond prices will rise indicating capital gain to the bond holders.
Which of the following increases the demand for money?
When there is an increase in the price level, the demand for money increases. Conversely, when there is a decrease in the price level, the demand for money decreases.
There are three reasons why people demand money: for use in transactions, for precautionary reasons (meaning in case of emergencies) and for speculative safety (meaning in case some investments drop in value).
Initially, a functional form is posited to explain the public's demand for real money holdings. This form is assumed to depend upon time, a nominal interest rate, and real expenditure.
Therefore, the motive behind the demand for money in an economy is different. The three main motives for which money is needed or demanded by people are Transaction Motive, Precautionary Motive, and Speculative Motive.
Answer and Explanation: A change in the interest rate does not cause a shift in the demand curve for money.
John Maynard Keynes, the father of Keynesian economics, proposed that the demand for money is based on three motives - transactions, precautionary, and speculative, collectively known as the Keynesian Demand for Money. Transactions demand - relates to the money required for day-to-day transactions.
What causes a shift? Changes in the interest rate are a movement along the money demand curve. Any other variables that impact money demand are a shift of the curve. Price Level: an increase in the price level (i.e., inflation) shifts the curve right and vice-versa.
When there is an increase in the price level, it means that people will require more money to purchase the same level of goods and services. As a result, the demand for money will increase, and this will shift the money demand curve to the right.
The Demand for Money: Two Components
They are the (1) transactions demand and the (2) asset demand. The (3) Total demand for money (keeping money in our wallets and not in our savings account where they can earn interest) then is the transactions demand plus the asset demand.
In his “General Theory of Employment, Interest and Money” (Keynes 1936), Keynes distinguishes between three reasons for holding money: the transaction motive, the precautionary motive, and the speculative motive.
Which of these affect demand?
The demand for a good increases or decreases depending on several factors. This includes the product's price, perceived quality, advertising spend, consumer income, consumer confidence, and changes in taste and fashion.
An increase in GDP will raise the demand for money because people will need more money to make the transactions necessary to purchase the new GDP. In other words, real money demand rises due to the transactions demand effect.
What is Demand for Money? The demand for money is the total amount of money that the population of an economy wants to hold.
The equation for the demand for money is: Md = P * L(R,Y). This is the equivalent of stating that the nominal amount of money demanded (Md) equals the price level (P) times the liquidity preference function L(R,Y)--the amount of money held in easily convertible sources (cash, bank demand deposits).
People who have to repay their large debts will benefit from inflation. People who have fixed wages and have cash savings will be hurt from inflation. Inflation is a situation where the money will be able to buy fewer goods than it was able to do so as the value of money comes down.
References
- https://homework.study.com/explanation/which-of-the-following-is-not-a-function-of-money-a-store-of-value-b-price-mechanism-c-medium-of-exchange-d-unit-of-account.html
- https://unacademy.com/content/ca-foundation/mcqs/macroeconomics/
- https://www.ecb.europa.eu/press/conferences/shared/pdf/retpaym_150604/eschelbach_paper.pdf
- http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-17
- https://www.businessinsider.com/personal-finance/average-money-market-interest-rate
- https://homework.study.com/explanation/what-are-the-three-reasons-why-people-want-to-hold-money.html
- https://testbook.com/question-answer/supply-of-money-remaining-the-same-when-there-is-a--60290c832b2c2ee03477f8e1
- https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/the-money-market-apmacro/a/the-money-market
- https://quizlet.com/ca/497613271/econ102-flash-cards/
- https://www.studysmarter.co.uk/explanations/macroeconomics/financial-sector/money-demand-curve/
- https://www.investopedia.com/terms/l/liquiditytrap.asp
- https://link.springer.com/chapter/10.1007/978-1-349-11513-6_2
- https://www.investopedia.com/terms/d/demand_theory.asp
- https://study.com/academy/lesson/the-money-market-money-supply-and-money-demand-curves.html
- https://www.coursesidekick.com/economics/study-guides/boundless-economics/introduction-to-monetary-policy
- https://www.sciencedirect.com/topics/social-sciences/demand-for-money
- https://unacademy.com/content/question-answer/commerce/why-are-demand-deposits-considered-money/
- https://nielseniq.com/global/en/insights/analysis/2022/7-factors-that-influence-the-demand-of-consumer-goods/
- https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_review/1984/pdf/er700602.pdf
- https://www.creditkarma.com/financial-planning/i/what-causes-inflation
- https://www.federalreserve.gov/monetarypolicy/fomc.htm
- https://en.wikipedia.org/wiki/Demand_for_money
- https://dspmuranchi.ac.in/pdf/Blog/8)%20DEMERITS%20OF%20MONEY.pdf
- https://www.econlib.org/library/Enc/MoneySupply.html
- https://www.albany.edu/~bd445/Economics_350_Money_and_Banking_Slides_Spring_2013/Money_Demand_in_Hyperinflation_(Print).pdf
- https://www.businessinsider.com/personal-finance/what-causes-inflation
- https://study.com/academy/lesson/measuring-the-money-supply-explanation-and-examples.html
- https://byjus.com/question-answer/why-is-speculative-demand-for-money-inversely-related-to-the-rate-of-interest-2/
- https://business.baylor.edu/Tom_Kelly/2307ch15.htm
- https://open.lib.umn.edu/principleseconomics/chapter/25-2-demand-supply-and-equilibrium-in-the-money-market/
- https://www.investopedia.com/ask/answers/07/central-banks.asp
- https://economictimes.indiatimes.com/definition/demand
- https://quizlet.com/417664246/chapter-14-flash-cards/
- https://www.vaia.com/en-us/textbooks/economics/the-economics-of-money-banking-and-financial-markets-12th/quantity-theory-inflation-and-the-demand-for-money/q-13-according-to-the-portfolio-theories-of-money-demand-wha/
- https://smartasset.com/investing/how-much-interest-does-10000-earn-in-a-year
- https://www.investopedia.com/ask/answers/040715/how-does-money-supply-affect-interest-rates.asp
- https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Banks
- https://www.cliffsnotes.com/study-guides/economics/money-and-banking/functions-of-money
- https://study.com/academy/lesson/the-four-basic-functions-of-money.html
- https://homework.study.com/explanation/which-one-of-the-following-will-shift-the-demand-for-money-curve-rightward-a-an-increase-in-the-interest-rate-b-a-decrease-in-the-interest-rate-c-a-decrease-in-the-price-level-d-an-increase-in-the-price-level-e-an-increase-in-real-gdp.html
- https://www.dallasfed.org/research/economics/2023/0110
- https://quizlet.com/explanations/questions/which-of-the-following-will-increase-the-demand-for-money-a-a-fall-in-the-aggregate-price-level-b-an-8a5d0b1c-b4ef-48c1-8d39-40bf2aa07db4
- https://brainly.com/question/42311104
- https://www.investopedia.com/ask/answers/042015/how-does-money-supply-affect-inflation.asp
- https://www.investopedia.com/terms/m/monetary-aggregates.asp
- https://www.studysmarter.co.uk/explanations/macroeconomics/economics-of-money/keynesian-demand-for-money/
- https://homework.study.com/explanation/compare-and-contrast-the-transaction-demand-and-asset-demand-for-money-what-is-the-relationship-between-interest-rate-aggregate-income-and-price-level-in-your-answer-provide-2-specific-examples-of-transaction-demand-for-money-and-2-specific-examples.html
- https://www.investopedia.com/terms/q/quantity_theory_of_money.asp
- https://www.oreilly.com/library/view/operations-management-an/9781118122679/ch14-sec016.html
- https://www.toppr.com/guides/economics/market-equilibrium/shifts-in-demand-and-supply/
- https://saylordotorg.github.io/text_international-economics-theory-and-policy/s21-11-effect-of-a-real-gdp-increase-.html
- https://articles.outlier.org/a-decrease-in-quantity-demanded
- http://www.sfu.ca/~wainwrig/Econ100/105-notes%20Money%20demand-%20interest%20rates-and%20policy.pdf
- https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Monetary-Policy
- https://quizlet.com/99324911/chapter-4-financial-markets-flash-cards/
- https://www.stlouisfed.org/education/feducation-video-series/episode-1-money-and-inflation
- https://byjus.com/commerce/demand-for-money/
- https://www.toppr.com/ask/question/state-the-types-of-demand/
- https://www.investopedia.com/articles/investing/053115/how-central-banks-control-supply-money.asp
- https://study.com/academy/lesson/quantity-theory-of-money-output-and-prices.html
- https://eml.berkeley.edu/~obstfeld/182_sp06/c14.pdf
- https://courses.lumenlearning.com/suny-macroeconomics/chapter/the-demand-for-money/
- https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Inflation
- https://www.albany.edu/~bd445/Economics_301_Intermediate_Macroeconomics_Slides_Spring_2014/Keynesian_IS-LM_Model_(Print).pdf
- https://www.studysmarter.co.uk/explanations/macroeconomics/economics-of-money/aggregate-money-demand/
- https://byjus.com/ias-questions/who-benefits-from-inflation/
- https://www.tutorhelpdesk.com/homeworkhelp/Finance-/Motives-Holding-Cash-Assignment-Help.html
- https://homework.study.com/explanation/there-are-three-reasons-why-people-demand-money-for-use-in-transactions-for-precautionary-reasons-meaning-in-case-of-emergencies-and-for-speculative-safety-meaning-in-case-some-investments-drop-i.html
- https://www.wallstreetmojo.com/demand-for-money/
- https://unacademy.com/content/upsc/study-material/ncert-notes/demand-and-supply-of-money/
- https://www.cliffsnotes.com/study-guides/economics/money-and-banking/the-demand-for-money
- https://www.geeksforgeeks.org/demand-for-money/
- https://byjus.com/question-answer/what-are-the-types-of-demand/
- https://quizlet.com/10469447/macroeconomics-test-3-flash-cards/
- https://byjus.com/commerce/meaning-of-demand-and-factors-affecting-demand/
- https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-long-run-consequences-of-stabilization-policies/money-growth-and-inflation/a/money-growth-and-inflation
- https://www.usna.edu/Users/econ/rahman/PS%208%20Fall%2010%20Ans.pdf
- https://www.sciencedirect.com/topics/economics-econometrics-and-finance/money-demand
- http://pholleran.asp.radford.edu/505_fall06_notes_monetary_PolicyWorks.html
- https://en.wikipedia.org/wiki/Transactions_demand
- https://wonderopolis.org/wonder/how-much-money-can-a-bank-hold
- https://corporatefinanceinstitute.com/resources/economics/demand-for-money/
- https://www3.nd.edu/~cwilber/econ504/504book/outln3b.html
- https://www.babypips.com/forexpedia/quantity-theory-of-money
- https://www.toppr.com/ask/question/would-lead-to-fall-in-demand-for-money/
- https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/the-market-for-loanable-funds/a/the-market-for-loanable-funds
- https://www.studysmarter.co.uk/explanations/macroeconomics/economics-of-money/quantity-theory-of-money/
- https://www.firstbanknigeria.com/basic-types-of-money/
- https://www.studysmarter.co.uk/explanations/microeconomics/supply-and-demand/
- http://www2.harpercollege.edu/mhealy/eco212i/ch14-17.htm
- https://quizlet.com/explanations/questions/what-three-motives-for-holding-money-did-keynes-consider-in-his-liquidity-preference-theory-of-the-demand-for-real-money-balances-on-the-bas-ff280d7b-09ac35d8-ef49-4574-aed1-a92644e4090e
- https://www3.nd.edu/~cwilber/econ504/504book/outln13e.html
- https://www.albany.edu/~bd445/Economics_350_Money_and_Banking_Slides_Spring_2013/Money_Multiplier.pdf
- https://homework.study.com/explanation/which-of-the-following-factors-does-not-shift-the-demand-curve-for-money-a-changes-in-the-interest-rate-b-changes-in-the-price-level-in-the-economy-c-changes-in-real-gdp-d-changes-in-real-income.html
- https://www.economicshelp.org/blog/glossary/demand-for-money/
- https://hbr.org/2022/12/what-causes-inflation
- https://quizlet.com/322946944/economics-ch15-flash-cards/
- https://www.rba.gov.au/education/resources/explainers/causes-of-inflation.html
- https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/demand-curve-tutorial/a/what-factors-change-demand
- https://www.forbes.com/advisor/banking/money-market-account/what-is-a-money-market-account/
- https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-9-functions-of-money
