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Money Demand

The document discusses money demand and supply, defining money demand as the amount society is willing to hold and influenced by factors like income and interest rates, while money supply is defined as the total money available in an economy. It highlights the interplay between money demand and supply in determining market interest rates and economic stability, with the central bank adjusting money supply to promote growth or curb inflation. Additionally, it notes that an imbalance in money supply can affect international trade and competitiveness.

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Jeany Claudia balqis
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31 views2 pages

Money Demand

The document discusses money demand and supply, defining money demand as the amount society is willing to hold and influenced by factors like income and interest rates, while money supply is defined as the total money available in an economy. It highlights the interplay between money demand and supply in determining market interest rates and economic stability, with the central bank adjusting money supply to promote growth or curb inflation. Additionally, it notes that an imbalance in money supply can affect international trade and competitiveness.

Uploaded by

Jeany Claudia balqis
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

• Money demand:

◦ Definition: refers to the amount that various sectors of society can and are willing to hold in the
form of money within a given income or wealth range.

◦ Influencing factors: income level, interest rate level, price level, market supply and demand,
credit development level, public preferences and expectations, etc. Generally speaking, the
higher the income, the greater the demand for money; the higher the interest rate, the more
people tend to save or invest, and the demand for money is relatively reduced; when prices rise,
people need more money for transactions, and the demand for money increases.

◦ Demand motivation: transaction motivation, people hold money for daily transactions;
precautionary motivation, people hold money to deal with unexpected expenses or emergencies;
speculative motivation, people hold money to seize investment opportunities, such as buying
bonds, stocks, etc.

• Money supply:

◦ Definition: refers to the stock of money that a country has at a certain point in time to serve the
operation of the social economy, which consists of deposit money and cash money supplied by
financial institutions including the central bank.

◦ Influencing factors: The central bank's monetary policy is a key factor affecting money supply,
such as adjusting the legal reserve ratio, rediscount rate, and conducting open market operations;
the credit scale of commercial banks, commercial banks create money by issuing loans, etc.; fiscal
revenue and expenditure situation, when the government's fiscal expenditure is greater than its
income, it may increase the money supply; international balance of payments situation, a surplus
in the balance of payments will lead to an increase in foreign exchange reserves, which in turn
affects the money supply.

The demand and supply of money affect each other and jointly determine the market interest
rate level and the value of money. When the money supply is greater than the demand, the
interest rate falls and the value of money decreases; when the money supply is less than the
demand, the interest rate rises and the value of money increases. The central bank achieves
macroeconomic goals by adjusting the money supply, such as stabilizing prices, promoting
economic growth, and reducing unemployment.

Economic growth and stability

◦ A reasonable relationship between money supply and demand is an important guarantee for
stable economic growth. The central bank can promote stable economic growth by adjusting the
money supply to match it with money demand. For example, during an economic recession, the
central bank increases the money supply, lowers interest rates, stimulates investment and
consumption, and promotes economic recovery; when the economy is overheated, it reduces the
money supply, raises interest rates, curbs excessive investment and consumption, and prevents
inflation.

◦ In addition, changes in the relationship between money supply and demand will also affect the
balance of international payments. When the domestic money supply is too much, it may lead to
rising prices, rising prices of export goods, and declining competitiveness, thereby affecting
exports; at the same time, the relative price of imported goods will fall, which may increase
imports and lead to an imbalance in the balance of international payments.

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