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Transaction demand for money. This is a situation where people hold money to purchase goods and services. This is the most common form of money demand as each and every individual in the world demand money to pay for services and goods for consumption.
Demand for money exhibits a negative relationship with the nominal interest rates. As the interest rates increases decrease, the demand for money increases. When the nominal interest rate decreases, the result is less attractive bonds (Langdana, 34). If a person gets a lower interest rate on the investment, he is more likely to trade those investments in for hard cash. Rising real incomes and increasing numbers of people employed will increase the demand for money at each interest rate. The transaction demand for money is positively related to inflation and income. An increase in a person’s income rises or as the prices increases, he will hold more money that will enable him carry out his daily transactions.
Monetary policy- in controlling the inflation in the economy, I would recommend that the central bank lowers the lending rates, normally to a target of around 2-3%. Monetarists emphasized on keeping the growth rate of money steadily and using monetary policy inflation. They opted for slowing the rise in the money stock, and increasing interest rates.
The next recommendation is to adjust the real wage. Increase in inflation makes get pay rise to offset inflation. However their real wage remain constant and hence the purchasing power is not lost as long as the nominal wage rise keep up and wages does not fall.
Monetary policy is the process by which the Central Bank of a country controls money supply that targets the interest rates for the purpose of enhancing economic stability and growth. Tools of monetary policy include:
Reserve requirements- this is the case where the monetary authority applies regulatory control over banks.
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