Analyse the Main Factors that Influence the Demand for Money
he market economy treats price as the measure of economic value and it is a dimension guide the business behaviour. In macroscopic economic policy, stabilize the price become the emphatic target. The inflation of the United States, the period is once high to reside 10% after later 70's, but after the middle of 90's is fall as low as level of below 3%.However, there are some nations can not completely successful control the inflation. For example in Soviet Russia, the price rises annually in 1000% can also be seen. Why can the United States close inflation this tiger in cage but Russia can't? The macroscopic economics can suggest that appropriate public finance currency policy, rate of exchange system and independent National Central Banks to deal with this problem. These are all link with a macroeconomic key concept¡ªmoney market. In the money market there are three main factors determinate the demand of money. They are the price level, real income and nominal interest rate. Firstly, the demand of money results from two reasons:
(b) The demand of the assets. This demand as an usage of the value keeping function of money. As above, there are three main factors determine the demand of money. Where M is the nominal stock of money, and P is the consumer price index. When we hold all other aspects equal, if we double the money supply as two times and the price level as a constant then the real money stock will double. We can make other mathematic change on this equation and we can conclude the change of demand of money easily. (2) The real income as a determinant of money demand: If the real income increase, the value of goods we want to buy increase as well, then we simply need more money for transactions, the demand of money increases. The increase of the goods value can be defined as real GDP. In the liquidity trap, money demand is perfect elastic, so money supply will not affect the interest rate. This is problem for the policymaker. The monetary authorities are thus unable to promote investment by cutting real interest rates. In this situation policymaker may need use fiscal policy rather than m
Some topics in this essay:
Central Banks,
,
Soviet Russia,
demand money,
money demand,
nominal rate,
price level,
determinant money demand,
determinant money,
liquidity trap,
real income,
monetary policy,
fiscal policy,
policy monetary policy,
policy monetary,
fiscal policy monetary,
money demand real,
income nominal rate,
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Approximate Word count = 731
Approximate Pages = 3 (250 words per page double spaced)
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