Demand and Supply for Money
DEMAND AND SUPPLY FOR MONEY – MACROECONOMICS REPORT
DEMAND FOR MONEY * What is Demand for Money?
The demand for money represents the desire of households and businesses to hold assets in a form that can be easily exchanged for goods and services. Spendability, or liquidity, is the key aspect of money that distinguishes it from other types of assets. For this reason, the demand for money is sometimes called the demand for liquidity. * Many factors influence our total demand for money balances. The four main factors are 1. the level of prices 2. the level of interest rates 3. the level of real national output (real GDP) 4. the pace of financial innovation
* Three Reasons or Motives for a Large Demand of Money
Economists have identified three primary motives for holding money:
• To settle transactions, since money is the medium of exchange.
• As a precautionary store of liquidity, in the event of unexpected need.
• To reduce the riskiness of a portfolio of assets by including some money in the portfolio, since the value of money is very stable compared with that of stocks, bonds, or real estate.
* Transaction Motives * Money is an essential element in order to have a purchasing power. * This is money used for the purchase of goods and services. The transactions demand for money is positively related to real incomes and inflation. As an individual's income rises or as prices in the shops increase, he will have to hold more cash to carry out his everyday transactions. The quantity of nominal money demand is therefore proportional to the price level in the economy. * The transactions motive for demanding money arises from the fact that most transactions involve an exchange of money. Because it is necessary to have money available for transactions, money will be demanded. The total number of transactions made in an economy tends to increase over time as income rises. Hence, as income or GDP rises, the
DEMAND FOR MONEY * What is Demand for Money?
The demand for money represents the desire of households and businesses to hold assets in a form that can be easily exchanged for goods and services. Spendability, or liquidity, is the key aspect of money that distinguishes it from other types of assets. For this reason, the demand for money is sometimes called the demand for liquidity. * Many factors influence our total demand for money balances. The four main factors are 1. the level of prices 2. the level of interest rates 3. the level of real national output (real GDP) 4. the pace of financial innovation
* Three Reasons or Motives for a Large Demand of Money
Economists have identified three primary motives for holding money:
• To settle transactions, since money is the medium of exchange.
• As a precautionary store of liquidity, in the event of unexpected need.
• To reduce the riskiness of a portfolio of assets by including some money in the portfolio, since the value of money is very stable compared with that of stocks, bonds, or real estate.
* Transaction Motives * Money is an essential element in order to have a purchasing power. * This is money used for the purchase of goods and services. The transactions demand for money is positively related to real incomes and inflation. As an individual's income rises or as prices in the shops increase, he will have to hold more cash to carry out his everyday transactions. The quantity of nominal money demand is therefore proportional to the price level in the economy. * The transactions motive for demanding money arises from the fact that most transactions involve an exchange of money. Because it is necessary to have money available for transactions, money will be demanded. The total number of transactions made in an economy tends to increase over time as income rises. Hence, as income or GDP rises, the