Demand for Money - Essay Example

Comments (0) Cite this document
What are key differences between the Fischer and the Baumol-Tobin approaches to the demand for money? The fundamental difference between Fischer's quantity theory of Money and the Baumol –Tobin approaches to the demand for money lies in the significance accorded to the real interest rate in determining the demand for money…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER96.7% of users find it useful
Demand for Money
Read TextPreview

Extract of sample "Demand for Money"

Download file to see previous pages Defining M as the money supply, P as the price level, Y as the real aggregate output and V as the Velocity of money, the average frequency of spending of a unit of money across all transactions in a given time period, the focal representation of the theory is through the equation of exchange: MV=PY. This equation simply states that the amount of money supplied multiplied by the number of times a single unit is circulated equals the nominal value of aggregate output or income. This is more or less a tautological identity. The equation of exchange however can be translated into a theory of money demand by noting that in equilibrium, money supplied is equal to money demand and therefore, M=MD and rewriting the equation of exchange as: (1) Thus, evidently, this theory implies that given a constant velocity in the short run and the price level, the demand for money is a function of Y only. Additionally, if Y is fixed at its full employment level and V is fixed in the short run then note that an increase in the money demand will lead to a proportional increase in the price level implying inflation. The assumption of a constant velocity in the short run follows from the belief that velocity is determined through technological and institutional factors of the economy and these factors undergo changes at very slow paces or are altered in discrete jumps over large intervals of time. Thus velocity remains unaltered over shorter time horizons. Therefore, to summarize Fischer's theory of money demand, money demand is determined by the magnitude of transactions generated by any particular level of nominal income PY and institutional and technological factors that determine the velocity of money. Rate of interest has no significance in the determination of the demand for money in an economy. The Baumol-Tobin approach to money demand is essentially an extension of Keynesian ideas regarding the demand for money. Keynes argued that interest rate has a substantial role to play in the determination of money demand. Particularly, Keynes noted that money demand has three components: the transactions demand for money, the precautionary demand for money and the speculative demand for money. Transactions demand for money is the demand that is generated due to the fact that receipts of money and expenses occur at different points in time and therefore, people have to maintain a reserve of money for transaction purposes at points in time when receipts do not occur but expenses must be made. Precautionary demand for money is the demand for cash that results due to people maintaining reserves for unforeseen contingencies. These two types of money demand, in Keynes' theory are functions of the income only. These were clubbed together by Keynes as L1(Y). The last part of money demand is the speculative demand for money which derives from the fact that people hold money since it is a store of value. According to Keynes' theory, people can either invest in bonds or hold cash money. The opportunity cost of holding cash as opposed to bonds is the forsaken interest payments or capital gains. The interest rate therefore has an inverse relationship with the speculative demand for cash. The idea was that if people expect a particular interest rate to prevail then if interest rates were above this, people would expect a decline in interest rates in future. This implies that bond ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
(“Demand for Money Essay Example | Topics and Well Written Essays - 1000 words”, n.d.)
Retrieved from
(Demand for Money Essay Example | Topics and Well Written Essays - 1000 Words)
“Demand for Money Essay Example | Topics and Well Written Essays - 1000 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


The effects of interest rate volatilities on the demand of Turkish money

...?Econometrics Assignment The aim of this study is to examine the effects of interest rate volatilities on the demand of Turkish money. The Turkish money is Lira. The period that has been taken for analysis is 1990 – 2000. Interest rates are predicted on time deposits and treasury bills. Time deposits are term deposits. The volatility of interest rate on treasury bills is positive, but it is statistically not significant while the volatility of interest rate on time and term deposit is negative but has a very high statistical significance. This theory of the effect of interest rate volatility on Turkish money demand can be established only through the...
18 Pages(4500 words)Essay

Aggregated demand Companies that deal in internet connection of high speed and personal electronics do not require many employees. Moreover, the jobs that they create skew steadily towards the peak of socioeconomic ladder. On the other hand, in the long term or long run, there is cause for sanguinity. There is no suggestion that consumers in America have bought their last houses and cars but the two are losing the great importance they have had to the economy in the past decade. There are countries in Europe where the housing rates are too low hence high incomes. Simple economics put it that if Americans spend low in cars and houses, there will be more income left for investment or savings and spending. Millennials main use for...
3 Pages(750 words)Research Paper

Supply & Demand

...?Supply and Demand: An Analysis Although one might be quick to assume that the food and beverage industry, specifically the fast food industry, is one that has a relatively inelastic level of supply and demand, this is only partially true. As will be detailed within this short analysis, there are a number of factors that work on a systemic and local level to differentiate the levels of supply and demand so that even though they may not make wild swings in movement, they are nonetheless nearly continuously in flux. Accordingly, the following analysis will present an argument for the way in which supply and demand is fundamentally shifted within the student beverage...
3 Pages(750 words)Article

Demand and Law of Demand

...Introduction Demand and Law of Demand Demand Structure Types of Consumers Elasti of Demand Introduction ZARA is the flagship brand of the Spanish retail group, Inditex SA, one of the largest retailers in the fashion retail market. The organization has been in the fashion retail business for over 30 years expanding from a single store which opened in 1975 to a present 3518 stores in 38 countries. It has 8 brands, some of which are Pulls & Bears, Missoni Dutti besides their largest selling brand Zara which comprises of 650 stores located in 50 countries. Inditex Group is the largest fashion retailer by sales in Europe1. The retail concept of Zara involves regular creation...
4 Pages(1000 words)Essay

Demand assessment

...Rural Diffuse Pollution Control Options In urban and rural dwellings, administrative entities and stakeholders are responsible for recognizing and following code of good practice for protecting the environment. To ensure our natural resources of water, soil and air are sustainable, pollution which impact the environment need to be curtailed. Pollution can be of two types - point source pollution which usually originate from building, store or field, or from a particular event; and diffuse pollution which originate from fields and many other rural sources within a catchment area. Diffuse pollution has deeper and wider impact because of the relative risks it poses to the environment. There are various options for controlling diffuse...
4 Pages(1000 words)Essay

Testing Money Demand Equation, Econometrics Assignment, SAS

...Testing Money Demand Equation, Econometrics Assignment, SAS Table of Contents Testing Money Demand Equation, Econometrics Assignment, SAS Table of Contents 2 Question 1 3 Question 2 7 References 10 Appendix 11 Question 1 Introduction The money market equation is a link between a few essential macroeconomic factors which indicates the aggregate demand of money in an economy over a considerable period of time. However, the form of the equation is purely a general one, which need not hold in the context of each and every economy. The present case study involves the situation in USA, and is aimed at examining the factors...
2 Pages(500 words)Speech or Presentation

The UK banking system has some ability to supply money endogenously by relying on liabilities to satisfy an increase or decrease in loan demand what would accommodate an increase or slowdown in economic activity.However, banking firms are limited in this

...). However, new arguments claim money is based on credit, created by commercial banks, and brought into the economy endogenously at the demand of the market (Wray, 1998). A greater demand for money hereby increases credit, of which debt is the other side. This strand of thought judges the money we utilize on a day-to-day basis, as bank debt, and thus for almost every Pound, Euro, or Dollar in existence someone has to go into debt with a bank. It is clear that money as debt is nothing new, but that in the evolution of this form of money, the banking system has gained an increasingly important role in our payments system...
6 Pages(1500 words)Essay

Demand Estimation

... from Rieber, W. J. (2010). The expenditure effects of supply side tax cuts: The role of the interest elasticity of money demand. Quarterly Journal of Business and Economics, 23(3), 29. Retrieved from Saez, E., Slemrod, J., & Giertz, S. H. (2012). The elasticity of taxable income with respect to marginal tax rates: A critical review. Journal of Economic Literature, 50(1), 3-50. doi: Demand Estimation al Affiliation Elasti of the variables Given that P=500, C=600 500, A=10,000 and that M=5000 from the given regression equation The quantity demanded can...
7 Pages(1750 words)Assignment

Demand Media

...Designed for: Demand media Designed by: KEY PARTNERS News Corp Hearst Corporation. You tube. San Francisco Chronicle. KEY ACTIVITIES Selling advertisements. Data collection and analysis. VALUE PROPOSITIONS Creating and hosting websites Outsourcing jobs to freelancers. CUSTOMER RELATIONSHIP The charges on search engines were favorable. They used social media They made it easier for customers to get answers for their queries. CUSTOMER SEGMENT Internet Users Advertisers. Branding. KEY RESOURCES Internet providers. Contracts Human resources e.g. Tech CHANNELS Used company’s website Smart phone apps and social media Print media and videos COST STRUCTURE Paying freelancers and company’s employees Purchasing websites e.g....
2 Pages(500 words)Case Study

Money Demand

...Factors that Affect the Demand for Money Money is needed to do almost everything in today’s world. This includes the purchase of services and goods. The essay that you are reading is about the demand for money and how it varies with various factors at hand. The reference or example that is used is the statistics on America’s citizens, how much they hold on the money. Other statistical information such as regression are utilized in the essay. The regression has been run using the data of new domestic cars. The unit time is one month and the values per unit time are the amount of money the American’s chose to hold on to...
8 Pages(2000 words)Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Demand for Money for FREE!

Contact Us