Financial Money and Money Supply

Money Demand

  • Money demand is influenced by households, consumers, investors, and the government.
  • People hold money instead of bonds or savings accounts.
  • There is an inverse relationship between interest rates (i) and the quantity of money demanded (Q_m).
  • If MD > Q_m, people need more cash due to events like inflation.
  • External factors other than interest rates can cause shifts in the money demand curve.
  • Inflation (PL↑) causes the money demand curve to shift right, as people need more cash to live.
  • Increase in Income causes Money Demand to shift Right

Factors Affecting Money Demand

  • Bonds: If interest rates drop, the money demand curve slides down.
  • Deflation: A decrease in the price level (PL↓) causes the money demand curve to shift left.
  • Recession: Similar to deflation, a recession causes the money demand curve to shift left due to decreased income (RGDP↓).

Money Supply

  • The central bank (CB) controls the money supply (MS) through monetary policy.
  • The money supply is independent of market demand.
  • MS can shift right to combat recession.
  • MS shifts left to combat inflation.
  • Central banks use monetary policy to control the economy.