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Demand and Supply of Money

This document discusses the demand and supply of money. It outlines the three main motives that drive the demand for money: transactions, precautionary, and speculative. It then discusses the concepts of money supply, including narrow, broad, and reserve money. The quantity theory of money and how the value of money is determined are also covered. Key terms like money multiplier, monetization, and monetary deepening are defined.

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Amal Raj Singh
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133 views12 pages

Demand and Supply of Money

This document discusses the demand and supply of money. It outlines the three main motives that drive the demand for money: transactions, precautionary, and speculative. It then discusses the concepts of money supply, including narrow, broad, and reserve money. The quantity theory of money and how the value of money is determined are also covered. Key terms like money multiplier, monetization, and monetary deepening are defined.

Uploaded by

Amal Raj Singh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DEMAND & SUPPLY

OF MONEY
BY- VASATIKA GHADIYARAM ~ 26
AMAL RAJ SINGH ~ 3
Table of Contents
 Demand for Money
 3 Basic Motives of people to hold money
 Transactions Motive
 Precautionary Motive
 Speculative Motive
 Supply of Money
 Concepts of Money Supply
 Quantity Theory Of Money
 Value Of Money
 Conclusion
 References
Demand For Money
 The demand for money refers to how much assets individuals
wish to hold in the form of money (as opposed to illiquid
physical assets). It is sometimes referred to as liquidity
preference.
 The demand for money is affected by several factors,
including the level of income, interest rates, and inflation as
well as uncertainty about the future. The way in which these
factors affect money demand is usually explained in terms of
the three motives for demanding money: the transactions, the
precautionary, and the speculative motives.
Transactions Motive
 Transactions Motive refers to demand for money for conducting day-to-day
transactions. This motive can be looked at from the perspective of consumers,
who want income to meet their household expenditure (income motive) and
from the perspective of businessmen, who require money to carry on their
business activities (business motive).
 The transaction motive relates to demand for money to meet the current
transactions of individuals and business units. The income, which a person gets,
is not continuous whereas, expenditure is continuous. So, to bridge the gap
between receipt of income and its expenditure, people hold cash.
 According to Keynes, transaction demand for money is positively associated
with the level of income, i.e. higher the level of income, larger would be the
size of money holdings for transactions.
Precautionary Motive
 Precautionary Motive refers to the desire of people to hold cash
balances for unforeseen contingencies. People wish to hold some
money to provide for the risk of unforeseen events like sickness,
accident, losses etc.
 The amount of money held under this motive, depends on the
nature of individual and on the conditions in which he lives. The
demand of money for precautionary balances is also closely
related to the level of income.
 Higher the level of income, more will be the cash balances for
contingencies.
Speculative Motive
 Speculative Motive refers to desire of the holder to keep cash
balance as an alternative to financial assets like bonds. Under
speculative motive, it is presumed that people can hold their wealth
either in the form of bonds or in the form of cash balances. The
decisions regarding holding of bonds or cash balances depend
upon the expectations about changes in the rate of interest or
capital value of assets in the future.
 Demand for money for speculative motive becomes less at high
interest rates and becomes large at low interest rates.
Supply Of Money

 In the present time, ‘Fiduciary Issue’ has replaced Barter System,


which was followed in the past.
 Modern Forms of money is simply papers or numbers in a Ledger.
 The worth of this piece of paper is decided by a relevant authority.
In India Reserve Bank of India (RBI) handles the issuing of this
currency on behalf of the government in our country.
 In India RBI is responsible for the money supply and control. It
maintains a separate Issue department for this purpose and keeps it
distinct from the Banking Department.

FIAT MONEY
Concepts of Money Supply

 NARROW MONEY: Currency with public i.e, coins and notes + Demand
Deposits of public with Banks. (Mostly Liquid assets in Financial System).
 M1 : Narrow Money
M2 : M1 + Post Office Savings Deposits
M3 : M2 + Time Deposits of the public with Banks + “Other” deposits with
the RBI. It is also Known as BROAD MONEY.
M4 : M3 + All other deposits with Post Office.
M0 : Currency in Circulation + Banker’s deposit with Central Bank +
“Other” deposits with Central bank (Also known as RESERVE MONEY)
 MONEY MULTIPLIER : M3/M0 (Ratio of Broad money to Reserve money)
 Monetization of Economy is measured by the Ratio of M1 to GDP.
 Monetary Deepening is the Ratio of M3 to GDP
Quantity Theory of Money

 This Theory asserts that any given percentage increase and


decrease in money will lead to the same amount of percentage
decrease or increase in general price of it.
 MV=PT ,
M= Supply of Currency; V= Velocity with which it circulates; P=
General Price Level; T= Transaction Volume.
Value of Money

 Since in the Present economy, Money is just a piece of paper with


great Value.
 To understand how the Value of Money is determined. We can take
an example of this Paper (FIAT MONEY) as a Product with Limited
Supply and Unlimited Demand.
 In this example, Law of Market applies to Money as well. i.e As long
as people want money, It’ll remain Valuable
 Example of Old Rs.500 notes after demonetization.
IMPORTANT POINT
Value of Money is it’s Purchasing Power and thereby Reciprocal to
Price Levels.
References

 https://www.cliffsnotes.com/study-
guides/economics/money-and-banking/the-demand-
for-money
 Geetika, Ghosh, P., & Choudhury, P. R. (2011).
Managerial economics (3rd ed.). New Delhi: Tata
McGraw Hill Education.
THE END

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