Money is a liquid asset used in the settlement of transactions. The demand for money is based primarily on money's role as a(n)? The demand for money is the relationship between the quantity of money people want to hold and the factors that determine that quantity. Previous In other words, the interest rate is the ‘price’ for money. Toward the end of the great German hyperinflation of the early 1920s, prices were doubling as often as three times a day. E) money being an interest-bearing asset. The Determinants of the Demand for Money: Keynes made the demand for money a function of two variables, namely income (Y) 4 and the rate of interest (r). The speculative demand for money is based on expectations about bond prices. The direct effect of an increase in the money supply is to: increase aggregate demand as people try to spend their excess money balances. The household could begin each month with $1,500 in the checking account and $1,500 in the bond fund, transferring $1,500 to the checking account midway through the month. For a given level of expenditures, reducing the quantity of money demanded requires more frequent transfers between nonmoney and money deposits. One way the household could manage this spending would be to leave the money in a checking account, which we will assume pays zero interest. Credit cards have a small contractionary effect on the demand for money. We will be seeing here the Keynesian approach for calculating the demand for money. All other things unchanged, the higher the price level, the greater the demand for money. The advantage of checking accounts is that they are highly liquid and can thus be spent easily. 1. 49334_14_ch14_p291-310.indd 292 49334_14_ch14_p291-310.indd 292 12/7/12 11:10 AM 12/7/12 11:10 AM 293 PART 5 you’ll earn $6 a year. and any corresponding bookmarks? The demand for money is affected by several factors such as income levels, interest rates, price levels (inflation), and uncertainty. In deciding how much money to hold, people make a choice about how to hold their wealth. 3.4 Money Demand as a Function of the Interest Rate So far, we have two reasons why the amount of money that people wish to hold might vary with the interest rate. This paper takes the needs for money from humanist psychology, namely the Theory of Motivation by Maslow, and relates these needs to the functions of He also said that money is the most liquid asset and the more quickly an asset can be … All other things unchanged, if people expect bond prices to fall, they will increase their demand for money. The speculative demand for money is based on expectations about bond prices. The demand for money is affected by several factors such as income levels, interest rates, price levels (inflation), and uncertainty. (Source: Moneycontrol) Demand for Money. In other words, transaction demand for money is an increasing function of money income. C) money's role as a standard of value. Speculative motive. Question. Give your own detailed explanation of liquidity preference theory and how the demand for money curve is determined. The logic of these conclusions about the money people hold and interest rates depends on the people’s motives for holding money. In evaluating the choice between holding assets as some form of money or in other forms such as bonds, households will look at the differential between what those funds pay and what they could earn in the bond market. Preferences also play a role in determining the demand for money. The two differ in … Up until the early 1970s, the money demand function was stable, but after that, financial innovation made velocity relatively unpredictable and hence implied a more unstable money demand function. star. That suggests that high bond prices—low interest rates—would increase the quantity of money held for speculative purposes. star. An increase in the spread between rates on money deposits and the interest rate in the bond market reduces the quantity of money demanded; a reduction in the spread increases the quantity of money demanded. Speculative balances are associated with the concept of a ‘normal’ INTEREST RATE.Each holder of speculative balances has his own opinion of what this ‘normal’ rate is. d.interest-bearing asset. The expectation of a higher price level means that people expect the money they are holding to fall in value. Some money deposits earn interest, but the return on these accounts is generally lower than what could be obtained in a bond fund. To simplify our analysis, we will assume there are only two ways to hold wealth: as money in a checking account, or as funds in a bond market mutual fund that purchases long-term bonds on behalf of its subscribers. 30. The third motive provides money yield. These components of the money supply are reflected in broad aggregates such as M1 or M2. • Money is what we use when we demand other goods. Among the most important variables that can shift the demand for money are the level of income and real GDP, the price level, expectations, transfer costs, and preferences. Remember that both approaches allow the household to spend $3,000 per month, $100 per day. A rise in transaction costs to buy and sell stocks and bonds. One reason people hold their assets as money is so that they can purchase goods and services.
2020 the demand for money is based on