Economics Q&A Library Explain with the aid of a graph, the impact of a cut in interest rate on the demand for money. The Determinants of the Demand for Money: Keynes made the demand for money a function of two variables, namely income (Y) 4 and the rate of interest (r). The reverse of any such events would reduce the quantity of money demanded at every interest rate, shifting the demand curve to the left. The Demand Curve for Money. from your Reading List will also remove any There is more than one interest rate in an economy and even more than one interest rate on government-issued … Household attitudes toward risk are another aspect of preferences that affect money demand. Because of this, the Federal Reserve moved away from using the money supply as its main policy indicator, and moved to interest rates as its main monetary policy indicator. Figure 10.8 “An Increase in Money Demand” shows an increase in the demand for money. • Money is what we use when we demand other goods. This paper takes the needs for money from humanist psychology, namely the Theory of Motivation by Maslow, and relates these needs to the functions of Money held for precautionary purposes may include checking account balances kept for possible home repairs or health-care needs. Q.2.1 The theory of the demand for money is based on John Keynes’ Liquidity Preference Theory. Such a curve is shown in Figure 10.7 “The Demand Curve for Money.” An increase in the interest rate reduces the quantity of money demanded. For example, if a stock market crash seemed imminent, the speculative motive for demanding money would come into play; those expecting the market to crash would sell their stocks and hold the proceeds as money. In recent years, transfer costs have fallen, leading to a decrease in money demand. In economics, the demand for money is the aggregate amount of cash that a population chooses to hold in wallets and bank accounts as opposed to saving and investing in mutual funds, certificates of deposits, IRA accounts, gold, houses or any other asset. © 2020 Houghton Mifflin Harcourt. 29. The household would thus have $3,000 in the checking account when the month begins, $2,900 at the end of the first day, $1,500 halfway through the month, and zero at the end of the last day of the month. The demand for money is the relationship between the quantity of money people want to hold and the factors that determine that quantity. Money, like other stores of value, is an asset. The demand curve for money shows the quantity of money demanded at each interest rate, all other things unchanged. The higher the price level, the more money balances a person has to hold in order to purchase a given quantity of goods. Putting those three sources of demand together, we can draw a demand curve for money to show how the interest rate affects the total quantity of money people hold. If we think of the alternative to holding money as holding bonds, then the interest rate—or the differential between the interest rate in the bond market and the interest paid on money deposits—represents the price of holding money. In the current monetary system based on fractional-reserve banking, commercial banks create about 90 percent of money supply in the form of demand deposits, time deposits, saving accounts etc. Answer the question(s) below to see how well you understand the topics covered in the previous section. Expert Answer . Specifically, nominal interest rates, which is the monetary return on saving, is determined by the supply and demand of money in an economy. 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