theories of money demand ppt

View CHAPTER 2a THEORY OF DEMAND.ppt from ECO 120 at Universiti Teknologi Mara. Each of us has an individual demand for particular goods and services and our demand at each price reflects the value that we place on a product, linked usually to the enjoyment or usefulness that we expect from consuming it. Given these assumptions, the Keynesian chain of causation between changes in the quantity of money and in prices is an indirect one through the rate of interest. Milton Friedman, at the forefront of the modern quantity theory, outlines a 4. The way in which these factors affect money demand is usually explained in terms of the three motives for demanding money: the transactions, the precautionary, and the speculative motives. Demand for money - Outline yMeaning of demand for money yFactors affecting the demand for money yTransaction demand for money yPrecautionary demand for money yAsset demand for money yMoney demand as a function of nominal interest rate and income 3 1. . This section will deﬁne what money is (which turns out to be less obvious a question than one might immediately think), describe theories of money demand, and describe the long-run behavior of money and the price level. A 22% increase in price . •Thus, from the view point of yield and risks of holding money, M2 is more appropriate. In turn, when the money supply retracted, individuals would limit their budgetary spending accordingly. 1. . According to Fisher, PT is SPQ. Title: Microsoft PowerPoint - Money Supply and Money Demand_R1 Author: gracekfwong Created Date: 4/28/2011 10:30:40 AM As the price increases, the same amount of money will purchase fewer products. . In monetary economics, the quantity theory of money (QTM) states that the general price level of goods and services is directly proportional to the amount of money in circulation, or money supply.For example, if the amount of money in an economy doubles, QTM predicts that price levels will also double. However, the range of assets considered in this portfolio selection exercise differs conSiderably between the two. . Demand a) Law of demand b) Determinants of demand c) Changes in demand … The major difference between the two theories of the inflationary process centres on the responsiveness of both the money wages and prices to change in demand. The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future. Demand for money yHolding money § To use money, one must hold money. intrinsically worthless, in equilibrium money can have value by a mechanism which can be related to the models of Samuelson (1958) and Bewley (1980).3 Crucially, in order for money to have value, enough agents should create demand for new savings through money to o set the supply of money by agents who want to spend it to consume. We model money supply and demand, and the role of nancial intermediaries as follows. 68 Portfolio theories of money demand emphasize the role of money as a: A) medium of exchange. They hold money for self insurance against this risk. 1. M2 . In other words, price level (P) multiplied by quantity bought (Q) by the community (S) gives the total demand for money. Instead, […] Friedman treats the demand for money as a part of the wealth theory. yIf people desire to hold money, there is a demand for Credit theories of money, also called debt theories of money, are monetary economic theories concerning the relationship between credit and money.Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. demand for money equals the supply of money. The total volume of transactions multiplied by the price level (PT) represents the demand for money. 69 The notion of a “dominated asset” implies that the portfolio theory of money demand should not be used to explain the demand for: A) M 1. . This would theoretically provide some control over aggregate demand (which is one of the primary areas of disagreement between Keynesian and classical economists). Those who believe that there is wage and price flexibility in the economy argue in favour of demand- pull inflation; because such flexibility renders it impossible for any cost induced inflationary trend to sustain itself. In the following figure, the vertical line QM represents the supply of money and L the total demand for money curve. CHAPTER 2 : DEMAND & SUPPLY THEORIES 1. B) M 2. The Law of Demand is the basis for price determination in an open market. Thirdly, Friedman treats the demand for money just like the demand for any durable consumer good. CHAPTER 2 THEORY OF DEMAND Topic Learning Outcomes At the end of … C) unit of account. D) standard for making deferred payments. Demand for money is positively related to P, that is inversely related to 1/P. 3 Main Approaches to Demand for Money are described below: (A) Classical Approach to Demand for Money: The main exponents of this approach are J.S. It is a temporary abode of purchasing power and hence an asset or a part of wealth. leads to an 11% decrease in quantity demanded. Quantity Theory of Money— Fisher’s Version: Like the price of a commodity, value of money is determinded by the supply of money and demand for money. The laws of demand and supply plays very important role in economic analysis .Thomas Carlyle, the famous 19th century historian remarked “It is easy to make parrot learned in economics; teach a parrot to say demand and supply” The most important function of microeconomics is to explain the laws of demand and supply, market mechanism and working of the price system. B) store of value. Most economic historians who give some weight to monetary forces in European economic history usually employ some variant of the so-called Quantity Theory of Money.Even in the current economic history literature, the version most commonly used is the Fisher … View ECO415_Topic Two.ppt from ADS 465 at Universiti Teknologi Mara. some time period will yield less and less satisfaction.3 As a result, the demand for a product at low prices is limited by taste and is not infinite even when the price equals zero. One of the primary research areas for this branch of economics is the quantity theory of money. The first theory to answer these questions known as the Keynesian theory of demand for money is based on … Money is more basic than the medium of exchange. Monetary economics is a branch of economics that studies different theories of money. Thus the precautionary demand for money can also be explained diagrammatically in terms of Figures 2 and 3. It aims to answer basic questions about how badly people want things, and how demand is … Let us get started. This is wh y demand curve for money, AB is sloping downward rapidly from point A to point C rapidl y. . Demand is different to desire! Money growth and inflation ; Value of money1/P. This creates money demand - as in Samuelson (1958) and Bewley (1980) money has value in equilibrium even though 18. Effective demand and quantity of money change in the same proportion so long as there are any unemployed resources. 0 80 100 Quantity 2. . Supply of money is controlled by the FED assumed to be a constant for this chapter. Overall, the quantity of money demanded at any given interest rate will be much Indeed, it seems likely that wealth would also roughly double in nominal terms over a decade in which nominal income had doubled. The demands of individuals for money are the most important factors in determining its value. This equation equates the demand for money (PT) to supply of money (MV=M’V). No matter how unlimited our demand for goods and services may be, we do not demand unlimited quantities of money. They argued that money is not demanded for its own sake, that is, not for its store value. Mill, Irving Fisher, Marshall, Pigou and Robertson—all grouped as classical economists. Equilibrium price level is determined at the level at which quantity demanded quantity supplied ; 7. In other words, money is demanded for transaction purposes. demand for money holdings through the portfolio motive. rate on money) and demand for money falls down when rate of interest increases. The demand for money on the part of ultimate wealth holders is formally identical with that of the demand for a consumption service. Quantity theory of money We begin with the classical theories refined at the start of the 20 th century by economists such as; Irving Fisher Alfred Marshall A.C Pigou Then move on to Keynesian theory and modern quantity theory of money by Milton Friedman The quantity theory of money develops the link between money supply and other … A 22% increase in price . Department of Economics University of Toronto MODERN QUANTITY THEORIES OF MONEY: FROM FISHER TO FRIEDMAN. He regards the amount of real cash balances (M/P) as a commodity which is demanded because it yields services to the person who holds it. All theories of demand for money give a different answer to the basic question: If bonds earn interest and money does not why should a person hold money? II. demand for money in terms of an exercise in portfolio selection. We will also look at the Elasticity of Demand and the concept of Demand Forecasting. Both the curve intersect at E 2 where the equilibrium rate of interest OR is established. THEORIES OF MONEY, INFLATION AND MONEY DEMAND I. When the money supply is expanded, individuals will be induced to higher spending. Since precautionary demand, like transactions demand is a function of income and interest rates, the demand for money for these two purposes is expressed in the single equation LT=f(Y, r) 9. Households manage productive projects that use capital and expose them to idiosyncratic risk. Prof. John Munro. money demand by making assumptions about velocity I Can write: M t = 1 V t P tY t I Monetarists: velocity is determined primarily by payments technology (e.g. When the price for a product is very high, the demand will decrease because, while Theory of Demand is the principle/law that correlates the demand for a product with the price of the product. The demand for money depends on three factors: Price level P. M1. Demand theory is one of the core theories of microeconomics. Inelastic Demand: Elasticity Is Less Than 1 Price $5 4 1. Unit Elastic Demand: Elasticity Equals 1 Price $5 4 Demand 1. Hence, not in the case of M1 = CC + DD, which earn either zero or very low interest rates. leads to a 22% decrease in quantity demanded. In his theory of demand for money, Fisher attached emphasis on the use of money as a medium of exchange. The Demand for Money Portfolio Theories of Money Demand •Portfolio theories are applicable when we consider broad money. . credit cards, ATMs, etc) and is therefore close to constant (or at least changes are low frequency and therefore predictable) I Let k = V 1 t and treat it as constant. Academia.edu is a platform for academics to share research papers. Demand 0 90 100 Quantity 2. . † Nominal Rigidities and … analyses you went through. . 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