Answer to Question #117301 in Macroeconomics for taimoor

Question

we consider the view that the demand for money is a constraint on
the demand for credit since credit cannot create money unless the resulting
deposits are willingly held. We dismiss this as only an equilibrium argument.
How does the role for the demand for money envisaged here by Laidler compare
with that argument?

Answer 1

Demand for money helps determine the interest rate and the supply of money. Banks.

Credit money refers to any future monetary claim against an individual that can be used to buy goods and services.

This is well argued by David Laidler on his theories of demand for money.

The Demand For Money and the Quantity Theory of Money Much of David Laidler’s early work was based on Milton Friedman’s modern quantity theory of money .According to the modern

quantity theory, nominal income and the price level were determined by the interaction of money supply and money demand.

Money supply was assumed to be determined by the exogenous forces of the monetary standard, monetary authority actions, and the banking system.

Money demand was posited a stable function of a limited number of important David Laidler’s Contributions to Economics .David Laidler on Monetarism 45 economic variables including a scale permanent real

income or wealth, several rates of return including the yields on securities both long and short run, the own return on money and the return from goods and services.

Given a stable demand function, changes in nominal income are determined by changes in the quantity of money.

In the short run, in the face of nominal rigidities, change in money impacts real output while in the long run changes in money are fully reflected in changes

According to Laidler Friedman’s approach differed markedly from the prevailing Keynesian view which emphasized the motives for holding money.

He extended Friedman’s original money demand function which found a stable long-run relationship between real cash balances and permanent income.

Laidler also was involved in the controversy over the short-run demand for money function.

Friedman’s money demand function was postulated as a long run equilibrium relationship in which agents’ desired holdings of real cash balances equaled their actual holdings.

However, as early as 1973 Goldfeld presented evidence showing instability in the short-run money demand function used by the Fed