Interest rates affect money demands
Stocks are shares in the ownership of a corporation.
Bonds are loans that are repaid with interest.
Money facilities transactions
Transaction demand for money: The demand for money is based on the desire to facilitate transactions.
Principle of Opportunity Cost: The opportunity cost of something is what you sacrifice to get it.
As interest rates increase in the economy, the opportunity cost of holding money also increases.
The quality demanded of money will decrease with an increase in interest rates.
The price level and GDP affect money demand
Other components of money demand
Illiquid: Not easily transferable to money
Liquidity demand for money: The demand for money that represents the needs and desires individuals and firms have to make transactions on short notice without incurring excessive costs.
Speculative demand for money: The demand for money that arises because holding money over a short period is less risky than holding stocks or bonds.
Individuals hold money for three motives: