Money Supply and Demand
- Theory of Liquidity Preference - the economist Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
- Money Demand - this is the amount of money we demand as cash in our pockets (for shopping) but not money we want to invest in bonds,
- If the interest rate is above equilibrium there is an excess ________ of money and this will cause interest rates to ________
- If the interest rate is below equilibrium there is an excess ________ for money and this will cause interest rates to ________
Motives for Holding Money
- Transactions Motive - holding money for day-to-day transactions like grocery shopping. It is due to the difference in timing between receiving and making money payments.
- Precautionary Motive - holding money for emergencies like emergency taxi to the hospital. It is due to the uncertainty of when money payments will need to be made.
- Asset/Speculative Motive - holding money to reduce the risk of your portfolio or to take advantage and buy stocks/bonds when their prices drop.
Shifts in Money Demand
1. Price Level - If price level increases the money demand will shift ________ because people will need more cash for shopping.
2. Income (output/GDP) - If the income increases the money demand will shift ________ because people will do more shopping and there are more transactions when output increases.
