Answer to Question #253724 in Microeconomics for Katlego

Question

Explain the link between each determinate and the quantity of money demanded

Answer 1

There are several types of demand for money which include;

a] Transaction demand which refers to money needed to buy goods and its directly related to income.

b] Precautionary demand which refers to money needed for financial emergencies.

c] Speculative demand for money which occurs when people wish to hold money rather than buy assets, bonds, and risky investment.

The quantity of money demanded refers to the desired holding of financial assets in terms of money and not assets within the economy. It depends on the interest rate such that if the interest rate within the economy is high then the demand for money will be low as people will seek to save and earn returns from the high interest rates. If the interest rate is low people will have higher demand for money since there is no incentive for saving.

The determinants of demand for money include; the price level, expected inflation rate, the interest rate, real gross domestic product. If the price level, expected inflation rate, real gross domestic product are high then the quantity demanded for money is also high.