Demand and Supply for Money

DEMAND AND SUPPLY FOR specie MACROECONOMICS REPORT DEMAND FOR MONEY * What is Demand for capital? The pray for funds represents the desire of ho make use of clinchs and businesses to hold assets in a form that can be easily exchanged for goods and work. Spendability, or quietity, is the key aspect of bills that distinguishes it from new(prenominal) types of assets. For this reason, the demand for immediate payment is sometimes called the demand for liquidity. * Many f movers influence our total demand for property balances. The four main factors be 1. the take of prices 2. the take aim of interest rates . the level of real issue output (real GDP) 4. the pace of monetary innovation * Three Reasons or Motives for a Large Demand of Money Economists have identified three primary motives for holding money To settle minutes, since money is the medium of exchange. As a precautionary store of liquidity, in the event of unexpected need. To reduce the riskiness of a portfo lio of assets by including some money in the portfolio, since the value of money is truly stable comp ard with that of stocks, bonds, or real estate. * operation Motives Money is an essential element in order to have a purchasing power. * This is money apply for the purchase of goods and services. The proceeding demand for money is positively related to real incomes and inflation. As an individualists income rises or as prices in the shops increase, he will have to hold more cash to carry out his perfunctory transactions. The quantity of nominal money demand is therefore proportional to the price level in the thriftiness. * Thetransactions motivefor demanding money arises from the fact that most transactions involve an exchange of money.Because it is necessary to have money available for transactions, money will be demanded. The total number of transactions made in an economy tends to increase over time as income rises. Hence, as income or GDP rises, thetransactions demandfor m oney also rises. * The transactions motive for money demand results from the need for liquidity for day-to-day transactions in the near future. This need arises when income is received only occasionally (say once per month) in discrete lists but expenditures evanesce continuously. Example Households and firms hold money or demand money in order to conduct uniform payments of goods and services they purchase from the market. * The households and firms hold money to pay for daily expenses such as food, clothing, transportation, and rentals. * In different words, people hold money for transactions purposes hence the motive is for transaction. * Precautionary Motive * This is money held to book binding unexpecteditems of expenditure. As with the transactions demand for money, it is positively correlated with real incomes and inflation. People often demand money as aprecautionagainst an uncertain future. Unexpected expenses, such as medical or car repair bills, often requireimmedia te payment. The need to have money available in such situations is referred to as theprecautionary motivefor demanding money * People need to be financially ripe in the future, especially in financing or paying for unforeseen events. * Example Money is apply for emergency expenses such as hospitalization, accidents, contingency funds for unidentified household or business expenses. * conceptional Motives This is money non held for transaction purposes but in place of other financial assets, usually because they ar expected to fall in price. * People want to earn the highest possible income from their different investments. Hence, they hold money to invest into assets or business prospects that have a promising steady flow of returns or income. * It depends on the decisions of households and firms to hold other assets that atomic number 18 liquid and free risks of depreciation in terms of money. * People hold money to make profits or avoid possible losses when the opportunit y in the financial market comes. Example If the bank interest rate is low, the amount of money held for speculative purposes is higher darn it is lower if the interest rate is high since the interest rate is the opportunity cost of holding cash. criterion THEORY OF MONEY (QTM) It states that the level of prices in the economy is dependent on the amount or level of money circulating in the economy. * The level of prices in the economy is basically the inflation rate. It is the rate at which prices are increasing. * Inflation refers to the increase in the general level of prices and therefore is the result of to a fault often money circulating in the economy.What would happen if there is an increase in the bring of or too much money circulating in the economy? * There is a possibility that every actor in the economy has so much money and it is natural for them to purchase goods or even services in the economy. An increase in the demand of goods and services without accompanying increase in the available leave will cause the equilibrium price in the economy increase. This premise can be clear explained if we discuss the quantity theory of money. The Quantity Theory of Money can be expressed by the equation MV=PYWhere M= quantity of money or money supply V= upper of money P= price level Y= aggregate output * PY can be understand as the market value of output of the economy or the national income or the GNP. * PY refers to the total income or expenditure for the economys final goods. Since it is the value of all final goods and services produced in the economy. It is alone regarded as the nations GDP. * From the given equation, velocity of money or V can be expressed as the ration of GNP and money supply. Let us take a go to at this equation V=PYM= GNPM For instance, GNP is equal to P300 B while the amount of money supply in the economy is P50 B then the velocity of money is equal to 6. V= GNPM= 30050=6 * This convey that a peso was utilise six times that year to purchase goods and services. * It also being interpret as the speed of money per year in the circulation. * The QTM assumes that the velocity of money (V) and aggregate output (Y) are fixed, or at least for simplicity purposes, we assume that these factors do not change (or do not change much) MV=PY As a result of the assumptions we made, changes in prices level (or the inflation level in the economy) is directly proportional to changes in money supply * It means that a percentage increase in the money supply will cause an equal percentage increase in the price level or will lead to inflation. THE COMPONENTS OF THE MONETARY STOCK There is a wide range of financial assets in any economy. * Money in the economy is not confined to be circulating paper, bills and coins and the mute money in the vaults of banks. * Money has many forms which comprises the monetary stock or the money supply in the economy.However, the question is, which part of these is called as or being co nsidered as money? * The following table shows the compartmentalisation of the monetary stock or the money supply. Definition of Money Components M1 Currency + encloseing Deposits + travelers Check + other checkable deposits such as NOW and ATS M2 M1 + Savings and Small Denomination Time Deposits + Money trade Mutual Funds M3 M2 + Large Denomination time Deposits + Repurchase Agreements L M3 + liquid assets such as securities (i. e. Treasury Bills), Bankers? Acceptances, Commercial Paper M1 comprises claims that are liquid. This refers to claims that can be used directly, instantly, and without restrictions to make payments. It consists of items used as medium of exchange. * M2 includes in addition, claims that are not instantly liquid, those that may require notice to depository cornerstone or banks. * M3 includes items that are held primarily by large corporations and wealthy individuals. * L consists of several liquid assets that are close substitutes for money. MAIN FEATURE S OF THE COMPONENTS OF THE MONETARY STOCK perspicuous Low interest earnings Less Liquid High interest earnings It should be noted that from M1 to L, the monetary stock is becoming liquid. M1 is directly used for transactions and L is less liquid and cannot be directly used for transactions purposes. * However, the trade-off is that if the individual hold more M1 than L, the individual is forgoing potential interest earnings from L. the L is being offered at a higher interest rate as compared to the M1. * In general, if you hold more M1, you are very liquid yet you earn little. On the other hand, if you hold more L, you find it very elusive to conduct day-to-day transactions yet you are earning much.Basic Concepts in Definitions * Currency * It refers to coins and bills (paper money) in circulation. * Checking Deposits * Accounts that grant a depositor the right to write checks to individuals, firms, or the governing body. This component is used in order to avoid carrying large am ount of money. * This particular component can be considered as money because checks are accepted as for of payments or exchange. * Traveler? s Check * It includes checks issued by non-banks such as American Express 8checks issued by banks are not checking deposits).It is usually used by travelers and tourists, since personal checks are not acceptable in other territories. Therefore, traveler? s check is generally accepted as payment in different territories. conveyable Order of Withdrawals * A check is invented by thrift institutions as a way getting more or less the prohibitions of having checking government notes. It is almost same function as travelers check. * Automatic Transfers from Savings Accounts (ATS) * When deposit holders keep money in savings account, the bank automatically transfers from the savings account to the checking account when payment has to be made.This method is usually for bank to bank or institutional transactions. All technical banks offer this servi ce where savings account can be transferred to other forms of financial assets such as checks or current account (e. g. sphere Bank ATS and Metro Bank ATS) * Savings Deposits * Deposits at banks that are not transferable by checks and are often recorded in a separate passbook or ATM (Automated Teller Machine) bill kept by the depositor. * Time Deposits * These are the accounts in a bank which require certain due date date. * Money Market Mutual Funds Interest-earning checkable deposits in financial intermediaries that raise funds by change shares to individual savers and invest in short-term assets. In addition, these are built-in in all commercial banks such as the BPI Mutual Funds and PNB Mutual Funds * Repurchase Agreements * These are transactions in which bank borrows from a non-bank customer * The bank sells a security today and promise to demoralize it back at a fixed price tomorrow (that is why it is repurchase) * In that way, the bank gets to use the amount borrowed fo r a day * Liquid Assets These are assets that can be easily converted into cash such as stocks, cash on hand, cash in banks and accounts receivable- * Treasury Bills * Securities that are issued by the government that have certain maturity date. For instance, the Philippine Government treasury bills (such as the Centennial Treasury Bills). * Banker? s Acceptance * These are orders to pay specific amount at a specific time. This concept usually arises from future date and guaranteed by a bank that stamps it as accepted. * Commercial Paper * It refers to a liquid short term debt instrument issued by private corporations.