Positive and normative economics examples. The levels of functioning of the economy. Positive and normative economics. Modern market economic system
(Demand for money) (M D) is the demand for liquid assets (usually the M2 unit) that people want to have at a certain point in time, at a given level of income. V national economy the demand for money grows with an increase in income, together with a decrease in the interest rate, with a decrease in the rate of turnover of money.
The demand for money is driven by two main motives: the demand for money for transactions (transactional demand) and the demand for money from the asset side.
Transaction demand the higher the larger the volume national product in the country, since there are more transactions being made. The demand for money also depends on the level of prices: the higher they are, the more money is required. The transactional demand for money depends on the rate of turnover of money, although by this issue economists disagree. By dividing the nominal national product by the rate of turnover of money, we obtain the transactional demand for money. We obtain the same result by multiplying the nominal product by the share of nominal cash balances in the national product.
The demand for money on the part of assets is determined by the fact that their financial assets (savings in intangible) market agents seek to distribute so as to reduce risk (increase reliability) and increase profitability, while maintaining a certain level of liquidity. To do this, the assets are divided into approximately three parts, investing in the purchase of shares, government bonds and keeping money in cash. The lower the interest rate, the higher the demand for money from assets, the lower the interest rate, since at a high interest rate, less liquid (more profitable) assets will be preferred over cash. The preference for liquidity is the rejection of possible income. This is the opportunity cost of keeping money, or the opportunity cost of keeping it. They are the higher, the more income, from which the owner of the money refuses, keeping it in the form of cash. Consequently, the opportunity cost of keeping money is equal to the lost profit of the owner of the money, and it is the greater, the higher the interest rate. As we will see later, the state, by changing the interest rate (refinancing rate), will also change the opportunity cost of keeping money, and, consequently, the demand for money will also change. In their analysis, the classics emphasize transactional demand, while the Keynesians emphasize the portfolio approach 1. Combining these two approaches, three factors of the demand for money can be distinguished:
- Income level (volume of GDP).
- Velocity of money circulation.
- Nominal interest rate.
Assuming the velocity of money circulation unchanged, the demand function for real money (demand for real money balances) can be represented as follows:
\ begin (pmatrix) M \\ P \ end (pmatrix) ^ D \; = \; L (i, \; Q).
The demand for money as liquid assets L depends on nominal rate percent i and real output Q. Replacing the designation of income "Q", by "V", by which we mean GDP, NNP, ND, we get the following equation:
M ^ D \; = \; L (i, \; V).
The demand for nominal money depends on the nominal interest rate and the nominal volume of the issue. The money demand function is a curve depending on "i" and "V" (see figure).
An increase in the volume of output will shift the money demand curve to the right, a decrease - to the left. An increase in the interest rate will reduce the demand for money for the same volume of issue. The nominal interest rate depends on the real rate and the rate of inflation. This relationship is expressed by the following equation:
I \; = \; r \; + \; \ pi,
where r is the real interest rate;
\ pi - inflation rate (consumer price index).
Height money supply will cause an increase in the price level (inflation), which will increase the nominal interest rate (while trying to keep the real rate at the same level), since \; r \; = \; i \; - \; \ pi.
The relationship between the inflation rate and the nominal interest rate is called the Fisher effect 2. By setting the interest rate, banks will strive to take into account not the current, but the expected inflation. Taking this into account, Fisher's formula is slightly modified: i \; = \; r \; + \; \ pi \ ast, where \ pi \ ast is the expected inflation. At high rates inflation rate, a more precise formula is used to determine the real interest rate:
R \; = \; \ frac (i \; - \; \ pi) (1 \; + \; \ pi).
The overall demand for money depends on both expected inflation and the expected real return on stocks and bonds. With high inflation rates, the demand for national currency falls, which is not offset by the high nominal yield of securities. This is especially true in immature markets.
1 Keynes singled out the speculative motive for the demand for money. Speculative demand is based on the inverse relationship between the interest rate and the bond rate based on the formula: P b = a / i, where P b is the price of the bond (bond), a is the fixed income on bonds, i is the interest rate (nominal).
2 More precisely, the Fischer effect is that an increase in the inflation rate by 1% will cause an increase in the nominal interest rate by 1%.
Basics of economic theory. Lecture course. Edited by A.S. Baskin, O.I. Botkin, M.S. Ishmanova Izhevsk: Publishing House"Udmurt University", 2000.
Money must be seen as product that is bought and sold in the market.
Demand for money exists because people want to purchase certain goods (goods). These goods must be bought with money.
Quantifying demand based on the equation money circulation , which was formulated by the American economist I. Fisher:
M x V = P x Q,
where M is the mass of money in circulation; V is the speed of money turnover; R - average price goods and services; Q is the number of goods or services sold.
The equation shows that the amount of money required for circulation, multiplied by the number of their turnovers per year, is equal to the volume of GNP.
Transforming the equation of I. Fisher, we get:
V = (P x Q) / M,
M / PQ = 1 / V.
The resulting equation shows that the ratio of the amount of money in circulation to nominal income is the reciprocal of the velocity of money circulation. Multiplying both sides of the equation by PQ, we get:
M = PQ / V.
The amount of money in circulation is equal to the ratio of nominal income (GNP) to the velocity of money circulation.
If we replace M with MB - the amount of demand for money, then the amount of money required by economic agents (firms, individuals) will be equal to:
MD = PQ / V.
Hence, the amount of demand for money depends on:
a) absolute price level. The higher the prices, the more money is required in circulation;
b) on the level of real production volume. As the volume of production grows, real incomes grow, which implies an increase in the demand for money;
v) on the rate of turnover of money in circulation. All parameters affecting the velocity of money circulation will also affect the demand for money.
The theory of the demand for money developed in the writings of prominent economists of the 20th century. He made a significant contribution to monetary theory D.M. Keynes.
He divided the demand for money is of two types: demand for money for transactions(trading operations) and the demand for money as a financial asset that generates income.
D.M. Keynes considered interest rate (capital resource price) as a determining factor in the demand for money. Considering money as one of the forms of wealth, he argued that part of the assets that economic entities want to keep in the form of money depends on the degree of their liquidity.
According to this theory, there is Feedback between the amount of demand for money and the rate of interest. Business agents keep a portion of the wealth in a liquid form if they believe that another form of wealth may involve significant risk or loss.
At the same time, cash does not bring the income that economic agents receive from storing wealth in the form bank deposits or interest bearing bonds.
Since the interest rate becomes in this case the opportunity cost of keeping wealth in cash, more high rate interest lowers the demand for money, and a low interest rate - increases.
Money demand function appears as:
(M / P) d = L (r, Y),
where r is the interest rate; Y is income.
The magnitude of the demand for money is directly proportional to income and inversely proportional to the interest rate.
In a graphical display of this money demand curve functions will have negative slope, and the slope will increase as the interest rate decreases for a given level of income. With an increase in income, the demand curve for money will shift to the right and up, and with a decrease, respectively, to the left and down.
So, the demand for money as a medium of circulation is determined by the level of monetary, or nominal, GNP (in direct proportion). The more income in society, the more transactions are made, the higher the price level, the more money will be required to carry out economic transactions within the national economy.
With a certain simplification, we can say that operational demand for money does not depend on the interest rate, and then the graph of the demand for money for transactions will look like this (Fig. 1).
Rice. 1. Operational demand for money
Demand for money as a store of value depends on the value of the nominal interest rate (inversely proportional), since, as emphasized earlier, when owning money in the form of cash and check deposits that do not bring the owner interest, there are certain imputed (alternative) costs compared to using savings in the form of securities.
Distribution financial assets, for example, for cash and bonds, depends on the value of the interest rate: the higher it is, the lower the price of securities and the higher the demand for them, the lower the demand for cash (the lower the speculative demand), and vice versa (Fig. 2).
So, general demand for money depends on the nominal interest rate and the volume of nominal GNP.
Rice. 2. Demand for money as an asset
The graph of the total demand for money will look like this.
Rice. 3. General demand for money
In fig. 3 nominal interest rate- on the vertical axis, general demand for money- on the horizontal axis. The functional dependence of these parameters will give a set of curves, each of which corresponds to a certain level of nominal GNP.
Movements along the curve show changes in the interest rate. Moreover, at high interest rates, the curve becomes almost vertical, since all savings are invested, in this situation, in securities, and the demand for money is limited by operational demand and no longer decreases with a further increase in interest.
Representatives of monetarist direction(M. Friedman, D. Patinkin, E. Phelps).
Unlike D. Keynes monetarists considered money in a wider range of assets. They rejected the separation of the demand for money for transactions and for assets, they proposed to estimate demand taking into account adaptive expectations and the presence of inflation.
M. Friedman proposed a new interpretation of the equation of money circulation:
M. V = P. Y,
where Y is the value (rate) of income from assets.
In this regard money demand function can be expressed:
MD = f (y, r, h),
where y is the nominal income from assets; r is the expected real interest rate; h is the expected inflation rate.
Money supply is the actual volume of money supply in the market. To ensure economic stability, it is important to constantly monitor the amount of money put into circulation.
As is known, state represented by central bank is the issuer of the money supply. It seemed relatively easy to establish control over the amount of money issued. But this is only at first glance. Indeed, to banknotes (cash), we must add a non-cash mass of money (money in bank accounts, demand accounts, checks and cards, etc., as well as government securities, stocks and bonds of companies and firms).
All of this makes us consider money in a broad sense as a set of their individual forms or monetary aggregates.
Under " monetary aggregate»Means any of several monetary forms (assets) serving as a specific expression of the money supply. Monetary aggregates are classified according to the degree of liquidity of monetary assets.
In addition to this category, there is also the concept of "monetary base".
The monetary base includes the amount:
Cash in circulation, including in the non-financial sector and at the cash desks of commercial banks;
The demand for money is a reflection of really existing needs and, in general, for real actors in social production. Money is requested to organize the process of production of material and spiritual benefits. The supply is determined by the aspirations of those economic agents who print money and who suffer from income and, above all, for themselves. The practical implementation of the theory of the primacy of the money supply poses an exceptional danger to society. It has been convinced of this many, many times, and, above all, through inflation.
The demand for money is an objectively determined value of the money supply that satisfies the needs of society in a universal equivalent. Demand stems from the role that money plays throughout society and from all of its functions in the economy. The functions of money have been described in detail in one of the previous topics. But money is needed not only in the economy. They are used as a means of payment in all other areas of society, incl. in social and spiritual. They play this role only because real money is a product human labor... It seems that receiving a pension with beautifully printed papers, if it is not banknotes, nobody wants to. This is further evidence that no one invented or introduced money by legal laws.
The demand for money, in accordance with the duality of commodity-de-neg, splits into two components - into money as a means of circulation and payment, and money as a means of saving and accumulating wealth. The first demand in the economy was named as transaction demand for money, the second - as a means of acquiring and accumulating financial assets. Transactional demand is determined by the need for money to ensure the functioning of the economic mechanism. In the second case, demand is determined mainly by the total cash income population and business owners.
The substantial characteristic of the demand for money is the amount of money or its money supply. On this basis, the quantitative theory of money appeared in economic theory. Previously, the characteristics and criticism of the quantitative theory have already been given. The modern interpretation of the quantitative theory should be based on taking into account the real volume of production, the velocity of circulation of money and the level of prices. The formula for the amount of money that characterizes demand is as follows:
V = P / M
, where V is the velocity of money circulation; P is the absolute price level; M is the amount of money in circulation.
However, this formula does not take into account the required amount of money due to the accumulation of wealth and when using a wide range of financial assets. In addition, the formula does not take into account the widely used today cashless payments and inflation. In this sense, the most serious claims must be made to economic theory. In its positive content, it froze on I. Fisher and J.M. Keynes.
In order to correctly comprehend the nature of money, it is necessary to reproduce in memory the fact that money, as a measure of value, is ideal, that is, mentally imagined money. All sellers, before selling their goods, evaluate them with the ideal amount of money. It is this amount of money that constitutes the real demand for money. If we imagine that the entire product created in society is subject to one-step implementation, then the demand for money will equal GDP.
The demand for money is a derivative of three factors, firstly, the value of the money itself, secondly, the cost of the goods sold, and thirdly, the effective organization of money circulation. The economy doesn't need much money. K. Marx wrote, "read from right to left the marks of any price list, and you will find an expression of the value of money in all kinds of goods." If such an operation is carried out in relation to the entire social product, then it is possible to obtain the value of the entire mass of money necessary for circulation. The increase will occur only at the expense of providing other areas of society where money is needed.
Demand for money- need economic agents, including households, in money for settlements and savings. It depends on the volume of transactions in the economy, the dynamics of GDP, changes in the population, the level of the interest rate exchange rate, inflation.
Money supply- the amount of money in cash and cashless forms created by the banking system ( the central bank and commercial banks).
The correspondence between the demand for money and their supply is ensured by the central bank when conducting monetary policy.
Determining the amount of money required for circulation is an important economic task. An excess of money leads to inflation, and a lack of money leads to deflation (falling prices). Both of these phenomena undermine the stability of the economic system. The central bank's job is to prevent both inflation and deflation.
Money demand formulas
The proposed K. Marx the formula for assessing the needs of the economy in money is:
where M - the amount of money in circulation (money supply); ΣΡ – the sum of the prices of all goods in the economy; V - the speed of money circulation.
At the beginning of the XX century. American economist I. Fischer proposed the so-called exchange equation. It reproduced the formula previously used by the Swiss astronomer and mathematician S. Newcomb. The exchange equation is:
where M - the amount of money in circulation (money supply); V - the speed of money circulation; at - real national income (in the modern version of the formula - GDP); R - price level.
The magnitude RU means nominal national income (nominal GDP).
The equation of exchange differs from the formula of Karl Marx by using, instead of the sum of prices of all goods, the indicator of real national income and the level of prices in the current period. Based on the equation of exchange, I. Fisher argued that the increase in money in circulation ( M ) leads to an increase in prices ( R ). But this is true only if the velocity of circulation of money is a stable value.
The exchange equation became the basis quantitative theory of money. This theory states that an increase in the amount of money in circulation leads to a proportional increase in prices, since the speed of money circulation is stable. The modern version of the quantitative theory is monetarism.
Economists from the University of Cambridge ( A. Ligu, A. Marshall ) another formula was proposed:
where k - part of the income stored by business entities in the form of money.
At first glance, it appears that k is equal to 1 / V, those. To - the reciprocal of the rate of money circulation. But such an interpretation obscures the fundamental difference between economic phenomena described by the above equations. The exchange equation expresses the security of the turnover of the means of payment; the Cambridge equation is the use of money as a store of value, i.e. asset. The magnitude To is the amount of money in transactions plus the amount of reserves of economic agents. Respectively, k is not equal to 1 / V, and the first and second equations are not identical.
The exchange equation reflects the dependence observed in the economy. But it is not suitable for practical calculations of the amount of money. The quantities used in this equation M, y, p can be found in statistical compilations, but V calculated as quotient of division ur on M. Trying to define M, knowing V and the volume of GDP, gives the value M, previously used in the calculation V. You can apply an average over a number of years indicator V. But this is advisable if inflation is completely absent in the economy.
J. Keynes the following equation was proposed:
where Y - the nominal income of the society as a whole; r - interest rate; L - designation of functional dependence.
This formula expresses the functional dependence of the amount of money in circulation (M) on the change in income L1 (Y) and the interest rate 12 (g). J. Keynes used the letter I to denote the function, trying to emphasize that these two arguments express two components of liquidity, i.e. demand for money.
The main difference between Keynes's formula and the equation of exchange is the use of the interest rate r. Unlike supporters of the quantitative theory of money, J. Keynes believed that the velocity of money circulation ( V ) Is an unstable value. Modern research has confirmed the influence of the dynamics of the interest rate on the amount of money required for circulation. Lower interest rates increase credit operations banks. The need for means of payment is increasing. At the same time, the money multiplier increases.
According to J. Keynes, any economic agent is able to choose the form in which he will keep his savings. But different assets have different degrees of liquidity. Obviously, the most liquid form of savings is money. It is the preference for liquidity that determines the need for money - the demand for money.
The preference for liquidity is determined, according to J. Keynes, by four motives: 1) the need to have part of the income in monetary form; 2) the need for money for commercial transactions; 3) a precaution; 4) the intention to participate in speculative transactions. The first two motives were combined by J. Keynes into one - transactional.
J. Keynes believed that up to certain limits, the growth of the money supply activates the factors of production, but outside these limits it causes inflation. The liquidity preference (demand for money) is determined by two variables - income and the rate of interest. This approach makes it possible to determine both the amount of money required for circulation and the amount of money that performs the function of accumulation. Emphasizing the value of the interest rate and denying the stability of the speed of money circulation - the main differences Keynesian theory from monetarism.
A milestone for the theory of demand for money was the publication in 1935 of the work J. Hicks "A proposal to simplify monetary theory." The researcher considered the development of monetary theory on the basis of representations reflected by the equation of exchange to be a dead-end path, since it contains a tautology. According to J. Hicks, the development of theoretical problems of the demand for money should be carried out on the basis of the theory of consumer choice. This conclusion is based on the fact that each economic agent decides for himself how much money he should have to ensure the optimization of his investment portfolio. The ideas expressed by J. Hicks were used in the development of a whole class of models of demand for money. But with this approach, the supply of money in the economy turns out to be independent of the needs of economic turnover. It turns out that the turnover should be adjusted to the decisions of economic agents regarding their money supply. Under such assumptions, it seems quite real that the money supply exceeds the needs of the economy, but does not affect prices, since the surplus is held by economic agents. This situation is possible only with gold circulation. Another thing is also important - money placed even in a demand deposit is automatically included in credit resources and has an impact on aggregate demand.
Various indicators can be chosen as the determinants of the demand for money, in particular, the volume of transactions in the economy, GDP, the amount of national wealth, the sum of debit turnovers on the bank accounts of economic agents. The discussion about which of the listed indicators most accurately determines the money supply continues to this day. I also did not find an unambiguous solution to the question of whether to use the M2 or M1 aggregate to determine the money demand.
One of the founders of monetarism K. Warburton believed that the demand for money is manifested in the additional need for means of payment. Such a need inevitably arises if economic agents are forced to increase their account balances (money supply) to ensure the sustainability of payments.
K. Warburton raised the question of what should be the money supply, allowing the most fully to use the factors of production. This researcher interpreted the degree of involvement of factors as the highest actually achieved level of production. The relationship between money supply and GDP is called monetary rule. K. Warburton spoke about " monetary rule"in relation to the conditions full use factors of production.
In its wording, this rule stated that the growth rate of the money supply should be 5% per year. The following calculation based on US statistics led to this result: 2% is the average long-term GDP growth USA per year; 1.5% - the rate of population growth per year; 1.5% is the rate of a long-term annual decrease in the rate of money circulation, which must be compensated for by an increase in the money supply. However, it later became clear that the speed of money circulation in the United States not only stopped falling, but began to rise. Therefore, in the calculations, one should not add 1.5%, but subtract. This gave a new figure for the required growth rate of the money supply - 2% per year.
A notable turn in the study of the demand for money is associated with work W. Bar - mole . In his interpretation, the stock of money needed to make current payments is similar to the stock of production resources. But the alternative to keeping a stock of money is interest-bearing securities. Therefore, the size of the stock of money is influenced by the cost of purchasing securities, i.e. brokerage commission.
The line of reasoning of W. Baumol was as follows. The amount of upcoming payments for transactions during a period (for example, a year) is assumed to be T. The stock of cash required to make these payments - WITH. To make payments, money will be borrowed at interest i. If you use your own working capital, then the owner loses a percentage i because he cannot put this money into a deposit. The size of the brokerage commission for operations with securities - b.
The magnitude T / C - the number of funds received during the year; bT / C - the annual amount of the brokerage commission.
It is assumed that payments are made evenly and in equal installments. Consequently, during the year, the money supply changes gradually and at the same rate from the value WITH to zero. Hence, the average annual stock is
Lost profits (lost interest) in annual terms will be iC / 2.
Total cost of ownership cash reserve is equal to
These costs must be minimized. The total cost is equal to zero and differentiated by WITH:
The stock of money should increase in proportion to the square root of the value of the volume of transactions. This is explained, according to U. Baumol, by the presence of costs for exchange transactions associated with the placement of capital. The brokerage commission when placing free money in liquid assets (securities) does not allow such transactions to be carried out as often as desired and makes it necessary to keep a certain share of the capital directly in cash pending forthcoming payments. Another important conclusion follows from the formula of W. Baumol: the higher the interest rate, the lower the money supply.
The main omission of W. Baumol is quite obvious - he assumed that payments are made at equal intervals of time, and the need for a money supply is stable. However, the proposed formula also has a more significant drawback. It does not take into account the growth in the size of the average transaction in conditions of concentration of production and scientific and technical progress.
J. Tobin drew attention to the relationship between the transactional demand for money, the interest rate and the costs of buying and selling securities (brokerage commission). The conclusions drawn are similar to those of W. Baumol. However, the research methodology of J. Tobin is in many respects original. If U. Baumol applied to the analysis of the cash stock the approach used in the optimization of stocks material resources, then J. Tobin was based on a purely Keynesian methodology of alternative storage of bonds and money supply.
J. Tobin also published a study on the development of a portfolio approach to the demand for money. In this case, the focus was not on the demand for transactional cash balances that provide payments for transactions, but for investment cash balances, i.e. free cash that their owners can invest in securities for a period of more than a year. Their owners prefer to keep part of these balances in cash without purchasing other assets. J. Tobin saw the reason for such stability of investment balances, first, in the inelasticity of expectations regarding the future rate of interest; second, uncertainty about the future rate of interest.
The portfolio approach assumes diversification of investments of both companies and households. At the same time, the size of the expected income and the risks associated with its receipt should be optimized. In the portfolio approach, cash is often viewed as a “risk-free” investment, although this is changing rapidly in the face of inflation. The need for money on the part of holders of investment balances determines the demand for money.
In interpretation M. Friedman the demand for money can be formally identified with the demand for consumer goods... It follows from this that the main factors in the demand for money are: 1) the total amount of wealth; 2) the costs associated with earning income from owning alternative forms of wealth; 3) goals and preferences of wealth owners.
M. Friedman identified five forms of wealth: money, bonds, stocks, physical goods, human capital... The demand for money is determined by the owner's decision to keep some of his wealth in money. If the owner seeks to increase the share of his total wealth that he holds in monetary form, the demand for money increases.
M. Friedman's equation does not contain the variable of the volume of transactions. The mentioned author explains it as follows. If money becomes more expensive, the ego leads either to an increase in "cheap deals", ie. intensifies operations with cheap goods, or generally predetermines a reduction in the number of transactions per dollar of final product. For M. Friedman, it is more important to determine the mechanism in which the amount of money acts as a result economic process... This mechanism begins to operate when the owner of wealth makes a choice between alternative assets. With this theoretical approach, the summand of all monetary parts of individual investment portfolios gives the value of the demand for money.
If gold were in circulation, then such an approach would have a right to life. But what are the reasons for economic agents to keep paper money in their hands or in bank accounts? There is only one reason - these "pieces of paper" must necessarily be needed by someone. They are needed for conversion. Therefore, M. Friedman's theory of demand for money inherited the lack of a portfolio approach to the demand for money proposed by J. Hicks. The condition for the balance of the individual portfolio of assets is the balance between the supply and demand of money as a means of circulation, ensuring the turnover of the market share of the national wealth.
The calculation of the demand for money is carried out in practice in the development and implementation of the IMF stabilization programs for transition and developing countries... The main feature of such programs is the strict binding of the provision of IMF loans to the mandatory observance of the measures proposed by this organization. economic policy... In other words, loan agreements with the IMF impose restrictions on the policies of national governments. The programs developed by the IMF are aimed at equalizing the balance of payments and stabilizing prices. This goal is traditionally achieved by compression aggregate demand in the national economy.
When assessing money demand, IMF experts used GDP dynamics and inflation. The volume of GDP in Russia in the early 1990s declined. Accordingly, according to the IMF experts, the money supply serving its turnover should have been reduced. At the same time, increased inflation was supposed to increase the speed of money circulation and reduce the need for money. Therefore, the IMF experts concluded that it is necessary to reduce money supply Bank of Russia. But the above reasoning did not take into account the realities transition economy Russia. The emergence of markets for land, real estate, securities, intermediary services, privatization, and the development of private entrepreneurship led to a rapid increase in the volume of transactions in the economy and, accordingly, to an increase in the demand for money. Its dynamics did not coincide with the dynamics of GDP.
Monetary policy implemented in Russia in the 1990s. based on the recommendations of the IMF, was aimed at reducing the money supply. But the lack of money in circulation led to the barterization of the economy and a drop in the level of production. Otta predetermined the overvaluation of the ruble exchange rate and caused a drop in exports. Barter settlements reached 80% of the total amount of settlements in the economy.
The increase in the volume of money supply in the Russian economy after the 1998 crisis, the achievement of a balance between the demand for money and their supply predetermined the beginning of economic growth.
- Hicks J ... A. Suggestion for Simplifying the Theory of Money // Economica. New series. 1935, February.
- Cm.: Baumol W. Economic theory and operations research. Moscow: Progress, 1965.
Several definitions can be found in the economic literature. Thus, the Finam dictionary gives the following:
The demand for money is the amount of liquid assets that people want to keep in their possession at the moment. The demand for money depends on the amount of income received and opportunity costs owning these incomes, directly related to the interest rate.
In some definitions, the demand for money is linked to the size of the gross national product (GNP). There is no contradiction here: when production grows, incomes of citizens and companies also increase, and vice versa.
What does it consist of
The demand for money breaks down into two components. They come from two functions of money: to be a means of payment and to act as an instrument of accumulation.
First, there is transactional demand. It reflects the desire of citizens and companies to have the means to conduct current transactions, purchase goods and services, and settle their obligations.
Second, they highlight the demand for money on the part of assets (or speculative demand). It appears because funds are needed to purchase financial assets and can themselves act as an asset.
What determines the demand for money: different theories
Each of the major economic theories puts forward his understanding of the demand for money and in different ways highlights the main factors of its formation. So, in the classical quantitative concept, the formula is derived:
This means that the demand for money (MD) directly depends on the absolute level of prices (P) and the real volume of production (Y) and is in inverse proportion to the speed of money circulation (V).
Representatives of the economic classics took into account only the transactional component of the demand for money. But over time, new models have emerged that look at the issue from different angles.
Keynesianism attaches great importance to the accumulation of cash by people. Also in this theory, the motives for which people keep money are important:
- Transactional motive. It is driven by the desire to have funds for constant purchases or transactions.
- Precautionary motive. It is associated with the need for people to have a reserve of money for unforeseen expenses and payments.
- Speculative. It arises when people prefer to keep funds in money, rather than other assets. This motive determines the speculative demand for money.
Keynesians established the dependence of speculative demand and the interest rate on securities in reverse proportion. High price makes money attractive investment, and the need for cash decreases. At low rates on the contrary, the attractiveness of keeping money in cash in highly liquid form increases.
Total demand was defined as the sum of transactional and speculative demand. Its size is directly proportional to income and inversely proportional to the interest rate. A graph reflecting this pattern can be found in any textbook on economics. It is also cited in articles specifically devoted to this issue.
It is now believed that the demand for money is influenced where more factors than previously thought. So, are important:
- nominal current income;
- percentage of income;
- the amount of accumulated wealth: with its positive dynamics, the demand for money also increases;
- inflation (rise in the price level), the growth of which also directly affects the demand for money;
- expectations about the economy. Negative forecasts cause an increase in the demand for cash, while optimistic ones provoke a reduction.
What is money supply
The money supply is the sum of all the money in the economy. With the monetary base unchanged, this indicator depends on the volume of banknotes in circulation and the size of the interest rate.
The money supply today provides banking system, which is made up by the Central Bank and commercial financial structures. The Central Bank has a regulatory role in this area. First, it issues banknotes (banknotes, coins). Secondly, the Central Bank regulates the issuance of loans financial institutions as it sets the refinancing rate.
If the demand for money becomes the same as the volume of supply, they speak of reaching equilibrium in the money market.