Demand And Supply of Money

Question 1

The demand for money…

Answer 1

The demand for money is the inquiry into the reasons for holding money.

Question 2

Explain the classical approach to demand for money

Answer 2

The classical approach: classical economists held the view that people hold money for transaction purposes
Mv=pt where m is total Money supply v is velocity of money in circulation p is prices of goods and services and t is value of transactions on goods and services
Then Marshall’s equation was a reformation or fishers equation where pt becomes py making it
Mv=Py
M is determined autonomously
Md=ms=mv
Md=py=kGNP

Question 3

Criticisms of classical approach

Answer 3

• Fisher assumes v and t are constant, so for p to increase there must be a rise in m but sometimes p may rise more than the qty of money in circulation
• fisher does not consider time lag
• m may increase without rise in p if t increases
• an increase in money ss is possible without causing any rise in prices if there is decline in velocity

Question 4

Explain the Keynesian approach to demand for money

Answer 4

Keynes believed that people do not only hold money for transaction purposes but other needs to 
He classified the demand for money into three categories which are
Transactionary motive (for medium of exchange function of money, it is influenced by the level of income. Expressed as :Lt=ky 
Lt is transaction demand for money, y is income and k is proportion of income which is kept for transaction purposes)
Precautionary motive (the desire to provide for contingencies during unforeseen situations )

And speculative motive is money held to gain advantages in changes in the price of goods or of bond holding

Question 5

The modern quantity theory of demand for money was led by

Answer 5

It was led by prof Milton Friedman
According to him the demand for money is a foundation of wealth, level of income, rate of interest,rate of change in interest rate ,price level, ratio of human to non human wealth,rate of change of price level
Written in equation as
Md=f(w,y,r,1/rdr/dt,p,1/p dp/dt,h)
He is trying to establish the relative powers of income and wealth to the demand for money as well S the importance of interest rate.