Money Supply and Demand

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

  supply

  ---

  of money and this will cause interest rates to

  fall

  ---

• If the interest rate is below equilibrium there is an excess

  demand

  ---

  for money and this will cause interest rates to

  rise

  ---

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