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Demand And Supply Of Money Pdf

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Supply and demand

Transactions motive. 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 transactions demand for money also rises. Precautionary motive. People often demand money as a precaution against an uncertain future.

Unexpected expenses, such as medical or car repair bills, often require immediate payment. The need to have money available in such situations is referred to as the precautionary motive for demanding money. Speculative motive. Money, like other stores of value, is an asset. The demand for an asset depends on both its rate of return and its opportunity cost. Typically, money holdings provide no rate of return and often depreciate in value due to inflation.

The opportunity cost of holding money is the interest rate that can be earned by lending or investing one's money holdings. The speculative motive for demanding money arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing it in some other asset. For example, if a stock market crash seemed imminent, the speculative motive for demanding money would come into play; those expecting the market to crash would sell their stocks and hold the proceeds as money.

The presence of a speculative motive for demanding money is also affected by expectations of future interest rates and inflation. If interest rates are expected to rise, the opportunity cost of holding money will become greater, which in turn diminishes the speculative motive for demanding money.

Similarly, expectations of higher inflation presage a greater depreciation in the purchasing power of money and therefore lessen the speculative motive for demanding money. Previous Functions of Money. Next Fiscal and Monetary Policy. Removing book from your Reading List will also remove any bookmarked pages associated with this title. Are you sure you want to remove bookConfirmation and any corresponding bookmarks?

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Supply and demand

In microeconomics , supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal , in a competitive market , the unit price for a particular good , or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded at the current price will equal the quantity supplied at the current price , resulting in an economic equilibrium for price and quantity transacted. It forms the theoretical basis of modern economics. Although it is normal to regard the quantity demanded and the quantity supplied as functions of the price of the goods, the standard graphical representation, usually attributed to Alfred Marshall , has price on the vertical axis and quantity on the horizontal axis. Since determinants of supply and demand other than the price of the goods in question are not explicitly represented in the diagram, changes in the values of these variables are represented by moving the supply and demand curves. In contrast, responses to changes in the price of the good are represented as movements along unchanged supply and demand curves.

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The demand for money refers to how much assets individuals wish to hold in the form of money as opposed to illiquid physical assets. It is sometimes referred to as liquidity preference. The demand for money is related to income, interest rates and whether people prefer to hold cash money or illiquid assets like money. Transaction demand for money — the money we need to purchase goods and services in day to day life. In the classical quantity theory of money. The demand for money is a function of prices and income assuming the velocity of circulation is stable.


PDF | Analyzing the relationship between supply and demand for money and the importance of monetary policy in achieving monetary stability.


Factors Affecting the Supply of and Demand for Money (Financial Economics)

Many studies of the demand for money, covering a wide variety of economies, have demonstrated the importance of financial innovations and shifts in monetary policy regimes, but they have also illustrated the difficulty of measuring and assessing such changes. Because innovations and regime shifts have differed markedly across countries, international comparisons can help identify their effects. This paper reviews the literature on money demand comparisons, focusing primarily on industrial countries. It finds that innovations have had widespread effects, but also that the demand for money is not generally less stable now than it was before those changes occurred.

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation. Economics 2 Reading Monetary and Fiscal Policy Subject 2. The Demand for and Supply of Money. Seeing is believing!

Demand and Supply of Money

In this section we will explore the link between money markets, bond markets, and interest rates. We first look at the demand for money. We then link the demand for money to the concept of money supply developed in the last chapter, to determine the equilibrium rate of interest.

Demand for money

Transactions motive. 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 transactions demand for money also rises. Precautionary motive. People often demand money as a precaution against an uncertain future.

In this section we will explore the link between money markets, bond markets, and interest rates. We first look at the demand for money. We then link the demand for money to the concept of money supply developed in the last chapter, to determine the equilibrium rate of interest. In turn, we show how changes in interest rates affect the macroeconomy. In deciding how much money to hold, people make a choice about how to hold their wealth. How much wealth shall be held as money and how much as other assets? For a given amount of wealth, the answer to this question will depend on the relative costs and benefits of holding money versus other assets.

Definition: The total stock of money circulating in an economy is the money supply. The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets. Description: Valuation and analysis of the money supply help the economist and policy makers to frame the policy or to alter the existing policy of increasing or reducing the supply of money.

The supply of money is a stock at a particular point of time, though it conveys the idea of a flow over time. The supply of money at any moment is the total amount of money in the economy. There are three alternative views regarding the definition or measures of money supply.

2 Comments

Kurt W. 17.12.2020 at 13:47

The demand for money refers to the total amount of wealth held by the household and companies.

PrГіspero N. 23.12.2020 at 04:00

In economics, the demand for money is the desired holding of financial assets in the form of money cash or bank deposits.

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