Hello welcome to this class on DEMAND AND SUPPLY OF MONEY. At the end of this chapter you will learn.
- Definition of demand for money
- You will learn reasons or motives holding money
- Definition of Supply of money
- And factors affecting the supply of money
Definition of Demand for Money
Demand for money is the total amount of money which all individuals in the economy wish, for various reasons, to hold. In other words, the demand for money refers to the desire to hold money; that is, keep ones resources in liquid form rather than spending it. The demand for money in economics is known as liquidity preference.
REASONS OR MOTIVES FOR HOLDING MONEY
Lord keynes postulated that there are three motives or reasons responsible for the demand for money or to hold money. These are:
- Transactional motives: People desire to keep or hold money for day-to-day transactions or current expenditures. Household needs to hold money in order to cater for the interval between the receipt of incomes and their expenditures.
- Precautionary motives: This is when people demand for money in order to meet up with unforeseen circumstances or unexpected expenditures. This may include sickness, unexpected visitors, etc. due to uncertainties in life, people keep money against future emergency that may require monetary expenditures.
- Speculative motives: This motive to hold money is specifically a business motive and refers to the desire to hold cash balance in order to embark on speculative dealings in the bond markets. The demand to hold money for specific purpose is elastic.
SUPPLY OF MONEY
Let’s look at Supply of Money and factors affecting the supply of money in economics
Definition: The supply of money refers to the total amount of money available for use in the economy at a given period of time. The supply of money involved the currency in the form of bank notes and coins circulating outside the bank system as well as the bank deposits in current account, which can be withdrawn by cheque (i.e, bank money).
FACTORS AFFECTING THE SUPPLY OF MONEY
Here we are going to be looking at the factors affecting the supply of money in economics.
- Bank rate: Bank rate is the rate of interest in which the central banks charges the commercial banks for lending money to or from them and discounting their bills. If the bank rate is high it will discourage banks from borrowing, and discounting of the bills will be affected, and this will affect the supply of money.
- Cash reserve: Cash reserve, also called cash ratio, is the percentage of the deposits commercial banks are expected to keep with them. Assuming that the cash reserve is high, the supply of money will definitely be low and vice versa.
- Economic situation: During the period of inflation in an economy, the Central Bank will reduce the supply of money and increase it during the period of deflation. My other article talks about inflation and causes of inflation to join the class [Click Here]
- Demand for excess reserves: When commercial banks demand for excess reserves, the supply of money will increase. Read more about functions of commercial Banks in my next article, to join the class [Click Here]
- Total reserve of the Central Bank: The supply of money is affected by the total reserves of the Central Bank,. If the total money supply by the Central Bank is high money supply will also be high, and vice versa. Read more on characteristics and functions of Central Bank in my other class, to join [Click Here]
In my next class we are going to be looking at the value of money, factors and measurement of value of money. To join the class [Click Here]