So when we draw a money demand curve as a function of r, and tell out little equilibration stories above, we are assuming that Y and P are not changing - a ceteris paribus or 'other things being equal' assumption. So if either Y or P (the price level) rise, money demand will increase. Feb 04, 2021 Factors Affecting Consumption 1. Real disposable income. The more money people have, the more they are likely to spend. For example, if wages are increasing above inflation, demand will receive a boost as customers have an increasing level of disposable income. As disposable incomes increase, consumers will spend a proportion of this, thereby. The aggregate demand curve for the data given in the table is plotted on the graph in Figure 22.1 “Aggregate Demand”. At point A, at a price level of 1.18, $11,800 billion worth of goods and services will be demanded; at point C, a reduction in the price level to 1.14 increases the quantity of goods and services demanded to $12,000 billion.

25.2 Demand, Supply, and Equilibrium in the Money Market

Learning Objectives

Explain the motives for holding money and relate them to the interest rate that could be earned from holding alternative assets, such as bonds.
Draw a money demand curve and explain how changes in other variables may lead to shifts in the money demand curve.
Illustrate and explain the notion of equilibrium in the money market.
Use graphs to explain how changes in money demand or money supply are related to changes in the bond market, in interest rates, in aggregate demand, and in real GDP and the price level.

In this section we will explore the link between money markets, bond markets, and interest rates. We first look at the demand for money. The demand curve for money is derived like any other demand curve, by examining the relationship between the “price” of money (which, we will see, is the interest rate) and the quantity demanded, holding all other determinants unchanged. 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.

The Demand for Money

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. The demand for moneyThe relationship between the quantity of money people want to hold and the factors that determine that quantity. is the relationship between the quantity of money people want to hold and the factors that determine that quantity.

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. A bond fund is not money. Some money deposits earn interest, but the return on these accounts is generally lower than what could be obtained in a bond fund. The advantage of checking accounts is that they are highly liquid and can thus be spent easily. We will think of the demand for money as a curve that represents the outcomes of choices between the greater liquidity of money deposits and the higher interest rates that can be earned by holding a bond fund. The difference between the interest rates paid on money deposits and the interest return available from bonds is the cost of holding money.

Factors That Increase Real Money Demand Formula

Motives for Holding Money

One reason people hold their assets as money is so that they can purchase goods and services. The money held for the purchase of goods and services may be for everyday transactions such as buying groceries or paying the rent, or it may be kept on hand for contingencies such as having the funds available to pay to have the car fixed or to pay for a trip to the doctor.

The transactions demand for moneyMoney people hold to pay for goods and services they anticipate buying. is money people hold to pay for goods and services they anticipate buying. When you carry money in your purse or wallet to buy a movie ticket or maintain a checking account balance so you can purchase groceries later in the month, you are holding the money as part of your transactions demand for money.

The money people hold for contingencies represents their precautionary demand for moneyThe money people hold for contingencies.. Money held for precautionary purposes may include checking account balances kept for possible home repairs or health-care needs. People do not know precisely when the need for such expenditures will occur, but they can prepare for them by holding money so that they’ll have it available when the need arises.

People also hold money for speculative purposes. Bond prices fluctuate constantly. As a result, holders of bonds not only earn interest but experience gains or losses in the value of their assets. Bondholders enjoy gains when bond prices rise and suffer losses when bond prices fall. Because of this, expectations play an important role as a determinant of the demand for bonds. Holding bonds is one alternative to holding money, so these same expectations can affect the demand for money.

John Maynard Keynes, who was an enormously successful speculator in bond markets himself, suggested that bondholders who anticipate a drop in bond prices will try to sell their bonds ahead of the price drop in order to avoid this loss in asset value. Selling a bond means converting it to money. Keynes referred to the speculative demand for moneyThe money held in response to concern that bond prices and the prices of other financial assets might change. as the money held in response to concern that bond prices and the prices of other financial assets might change.

Play real money pokies online. Best Real Money Pokie Bonuses. When you play pokies online for real money in Australia, you will definitely want to give yourself the best chances of winning big. There is no better way to make sure you multiply your initial deposit other than opting for a great welcome package or picking a no deposit bonus here and some free spins there. Spin The Reels and Win. Spin the reels of the pokies games and win great prizes. Spinning is really fun whether it is 5 reel pokies or the great progressive mega spin to play. All you need is to select the amount you want to stake and use plus or minus buttons to adjust your bet. “Paytable” button lists the win possibilities and all symbols.

Of course, money is money. One cannot sort through someone’s checking account and locate which funds are held for transactions and which funds are there because the owner of the account is worried about a drop in bond prices or is taking a precaution. We distinguish money held for different motives in order to understand how the quantity of money demanded will be affected by a key determinant of the demand for money: the interest rate.

Interest Rates and the Demand for Money

The quantity of money people hold to pay for transactions and to satisfy precautionary and speculative demand is likely to vary with the interest rates they can earn from alternative assets such as bonds. When interest rates rise relative to the rates that can be earned on money deposits, people hold less money. When interest rates fall, people hold more money. The logic of these conclusions about the money people hold and interest rates depends on the people’s motives for holding money.

The quantity of money households want to hold varies according to their income and the interest rate; different average quantities of money held can satisfy their transactions and precautionary demands for money. To see why, suppose a household earns and spends $3,000 per month. It spends an equal amount of money each day. For a month with 30 days, that is $100 per day. 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. The household would thus have $3,000 in the checking account when the month begins, $2,900 at the end of the first day, $1,500 halfway through the month, and zero at the end of the last day of the month. Averaging the daily balances, we find