Demand for money as an asset. Demand for money

Money should be considered as product which is bought and sold in the market.

Demand for money exists because people want to acquire certain goods (goods). These goods must be bought with money.

Quantifying Demand based on monetary equation, which was formulated by the American economist I. Fisher:

M x V = P x Q,

where M is the amount of money in circulation; V - money turnover rate; P is the average price of 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 I. Fisher equation, 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 by 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.

Consequently, The 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. As output rises, real incomes rise, which implies an increase in the demand for money;

in) on the rate of circulation of money in circulation. All parameters that affect the velocity of money circulation will also affect the demand for money.

The theory of demand for money developed in the works of prominent economists of the 20th century. He made a major contribution to monetary theory D.M. Keynes.

He divided There are two types of demand for money: demand for money for transactions(trading operations) and demand for money as a financial asset that generates income.

D.M. Keynes thought rate of interest (price of capital resource) as a determining factor in the demand for money. Considering money as one of the forms of wealth, he argued that the part of the assets that business entities want to keep in the form of money depends on the degree of their liquidity.

According to this theory, there is inverse relationship between the demand for money and the rate of interest. Economic agents hold a portion of wealth in liquid form if they believe that another form of wealth may involve significant risk or loss.

However, cash does not generate the income that economic agents receive from storing wealth in the form of bank deposits or interest-bearing bonds.

Since the interest rate becomes in this case the opportunity cost of holding wealth in cash A higher interest rate lowers the demand for money, while a lower interest rate raises it.

money demand function appears in the form:

(M/R) d = L (r, Y),

where r is the interest rate; Y is income.

The demand for money is directly proportional to income and inversely proportional to the rate of interest.

In the graphical representation of this money demand curve function will have negative slope, and the slope will increase as the interest rate decreases for a given level of income. When income increases, the demand curve for money will shift to the right and up, and when it decreases, accordingly, to the left and down.

So, the demand for money as a medium of exchange is determined by the level of monetary, or nominal, GNP (directly proportional). The greater the income in society, the more transactions are made, the higher the price level, the more money will be required to complete economic transactions within the national economy.

With some simplification, we can say that operational demand for money does not depend on the interest rate, and then the money demand schedule 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), because, as emphasized earlier, when holding money in the form of cash and checkable deposits that do not bring interest to the owner, there are certain opportunity (opportunity) costs compared to using savings in the form of securities.

The distribution of financial assets, for example, for cash and bonds, depends on 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 (lower speculative demand), and vice versa (Fig. 2).

So, general demand for money depends on the nominal interest rate and 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

On 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.

A serious contribution to the development of modern monetary theory was made by representatives 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 evaluate the demand taking into account adaptive expectations and the presence of inflation.

M. Friedman proposed a new interpretation of the monetary circulation equation:

M. V = P. Y,

where Y is the value (norm) of income from assets.

In this connection 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 rate of inflation.

money offer is the actual amount of money in circulation in the market. To ensure economic stability, it is important to constantly monitor the amount of money put into circulation.

As is known, the state, represented by the central bank, is the issuer of the money supply. It seemed relatively easy to control 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 state securities, shares and bonds of companies and firms).

All this makes us consider money in a broad sense as a set of their individual forms or monetary aggregates.

Under " monetary aggregate"is understood as any of several monetary forms (assets) serving as a specific expression of the money supply. Monetary aggregates are classified depending on the degree of liquidity of monetary assets.

In addition to this category, there is also the concept of "monetary base".

The monetary base includes:

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 the real needs and, mainly, of the really acting subjects in social production. Money is requested to organize the process of production of material and spiritual goods. The proposal is determined by the aspirations of those economic entities who print money and who suffer 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 was 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 the general equivalent. Demand results from the role that money plays in the whole of society and from all 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. In this role, they act only because real money is a product of human labor. It seems that no one wants to receive a pension with beautifully printed papers, if these are not banknotes. This is another evidence that no one invented money and did not introduce legal laws.

The demand for money, in accordance with the duality of the commodity-de-neg, is divided 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 is called 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 monetary income of the population and owners of enterprises.

The content 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, a characterization and criticism of the quantitative theory has already been given. The modern interpretation of the quantity theory should be based on taking into account the real volume of production, the velocity of money and the price level. The formula for the quantity of money that characterizes demand is as follows:
V=P/M
, where V is the velocity of money circulation; P - absolute price level; M is the amount of money in circulation.

However, this formula does not take into account the amount of money needed for wealth accumulation and when using a wide range of financial assets. In addition, the formula does not take into account the cashless payments and inflation that are widely used today. In this sense, the most serious claims should be brought against 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 recall in memory the fact that money, as a measure of value, is ideal, that is, mentally represented money. All sellers, before selling their goods, evaluate them with an 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-time sale, then the demand for money will become equal to GDP.

The demand for money is a derivative of three factors, firstly, the value of money itself, secondly, the cost of goods sold, and thirdly, the effective organization of money circulation. The economy does not need more money. K. Marx wrote, "read from right to left the marks of any price list, and you will find an expression for the magnitude 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– the amount of means of payment that the population and firms wish to keep in liquid form, i.e. in the form of cash and checkable deposits (to keep a cash register).

The types of demand for money are due to two main functions of money: 1) the function means of exchange 2) function store of value.

The first function determines the first type of demand for money - transactional.

Transactional demand for money(demand for money for transactions) - this is the desire of economic entities to keep a cash register for the purchase of goods and services. People want to have enough money so that they do not experience inconvenience when buying goods and paying for services.

nominal demand for money is the amount of money people or firms would like to have.

Because money is held to buy goods or services, the nominal amount of money needed in an economy changes with price changes.

From here, demand for money- this is the demand for real money balances or, in other words, the amount of money balances, calculated taking into account their purchasing power.

From the equation of the quantity theory of money (Fischer's equation): M V = P Y

it follows that the factor of the real demand for money (M/P) is the value of the real output (income) (Y) and the velocity of money (V). The transaction demand for money (M/P) D T R is equal to:

(7.9.)

where Y is real income (GNP volume),

n - the number of revolutions of the monetary unit per year.

Transactional demand for money (M/P) D T R is shown in Figure 7.3.a).

The point of view that the only motive for the demand for money is to use them for transactions, existed until the mid-1930s, until Keynes's book "The General Theory of Employment, Interest and Money" was published. In it, Keynes, in addition to the transactional motive for the demand for money, added two more motives for the demand for money - the precautionary motive and the speculative motive.

Precautionary demand for money This is explained by the fact that in addition to planned purchases, people also make unplanned purchases. Anticipating such situations, when money may be needed unexpectedly, people keep additional amounts of money in excess of what they need for planned purchases. According to Keynes, this type of demand for money does not depend on the interest rate and is determined only by the level of income, so its schedule is similar to the schedule of transactional demand for money.

In modern conditions, the property of economic entities takes the form of a portfolio of assets: money, bonds, shares, etc. The property itself is the result of savings. When making decisions about saving, an economic entity must determine, firstly, what part of the income should be saved and, secondly, in what form to carry out their savings.

Money, unlike many forms of other assets, does not generate income. Their usefulness lies in absolute liquidity, that is, money as property (savings) can be turned into money for transactions (medium of exchange) at any time.

Demand for money as an asset (property)(speculative demand for money) is due to the function of money as a store of value, as a financial asset. However, as a financial asset, money only retains value, but does not increase it. Cash has absolute (100%) liquidity (the ability to quickly and cost-free turn into any other assets), but zero profitability. At the same time, there are other types of financial assets, for example, bonds, which generate income in the form of interest.

Therefore, the higher the interest rate, the more a person loses by holding cash and not buying interest-bearing bonds. Consequently, the determining factor in the demand for money as a financial asset is the interest rate.

At the same time, the interest rate is opportunity cost of holding cash. A high interest rate means high bond yields and high opportunity costs of holding money on hand, which reduces the demand for cash. At a low rate, i.e. low opportunity costs of holding cash, the demand for it increases, because with a low profitability of other financial assets, people tend to have more cash, preferring its property to absolute liquidity. At a certain minimum interest rate, people refuse to save in the form of securities, preferring a more liquid asset - money.

Thus, the demand for money depends negatively on the interest rate, so the speculative demand for money curve has a negative slope (Figure 7.3.b)).

Modern portfolio theory of money proceeds from the premise that each economic entity is faced with the task of what part of the income to save, and what type of assets to turn the savings into (real estate, securities, etc.). People form a portfolio of financial assets. Asset Portfolio Optimization comes down to comparing income from non-monetary components of the portfolio with the benefit in the form of utility and convenience that subjects receive from holding cash.

O The total demand for money is made up of transactional and speculative (Fig. 7.3.c)).

Figure 7.3 - Types of demand for money.

Total demand for money:

(M/P) D = (M/P) D T R + (M/P) D A = kY – hr (7.10)

Where (M/P) D T R is the transaction demand for money

(M/P) D А - demand for money as an asset (property)

Y - real income (GNP),

r is the nominal interest rate,

k is the sensitivity (elasticity) of changes in the demand for money to changes in the level of income,

h is the sensitivity (elasticity) of changes in the demand for money to changes in the interest rate, (there is a minus sign in front of the parameter h in the formula, since the relationship between the demand for money and the interest rate is inverse).

Demand for money

DEMAND FOR MONEY

(demand for money) Recognition of the existence of a stable demand for money formed again the theory of monetarism. Based on this assumption, it can be shown that fiscal policy is neutral, i.e. when government spending pushes interest rates up, private sector investment falls accordingly. Moreover, changes in the money supply are a necessary and sufficient condition for changes in the nominal value of the gross domestic product or changes in the rate of inflation. However, in the course of econometric studies, it was not possible to reliably establish whether the demand for money is actually stable.

Finance. Dictionary. 2nd ed. - M.: "INFRA-M", Publishing house "Ves Mir". Brian Butler, Brian Johnson, Graham Sidwell et al. Osadchaya I.M.. 2000 .

Demand for money

Demand for money is the amount of liquid assets that people are willing to hold at the moment. The demand for money depends on the amount of income received and the opportunity cost of holding this income, which is directly related to the interest rate.

In English: Demand for money

Finam Financial Dictionary.

See what "Demand for money" is in other dictionaries:

- (demand for money) Recognition of the existence of a stable demand for money formed the basis of the theory of monetarism. Based on this assumption, it can be shown that fiscal policy is neutral, that is, ... ... Glossary of business terms

DEMAND FOR MONEY- - has a different interpretation in various theories. Monetarism considers money in circulation as the main instrument of macroeconomic analysis. Within the framework of the quantitative theory of money, S. per day is determined in accordance with ... ... Economics from A to Z: Thematic guide

DEMAND FOR MONEY- (English demand for money) - a generalizing concept used in economic analysis to explain the desire of economic entities to have at their disposal a certain amount of means of payment, or the general need of the market for money ... ... Financial and Credit Encyclopedic Dictionary

- (transactions demand for money) Demand for money to finance current expenses. Being part of the theory of liquidity preference (liquidity preference) J. M. Keynes, this demand is in many ways similar to the demand for money in quantity theory ... ... Glossary of business terms

The amount of money people want to have to use as a medium of exchange for making payments. The demand for money for transactions changes in direct relation to the change in nominal GDP. In English: Transactions ... Financial vocabulary

The amount of money people are willing to keep as savings. The demand for money as an asset varies inversely with the interest rate. With low interest rates or low opportunity costs of holding money, people... ... Financial vocabulary

Demand for money that is not elastic with respect to interest Demand for money that is insensitive to changes in the interest rate...

Interest elastic demand for money- Demand for money, sensitive to changes in interest rates ... Modern Money and Banking: A Glossary

Demand for money for speculative purposes- SPECULATIVE DEMAND FOR MONEY Demand for cash balances that are held in liquid form, for the possible use of them with a benefit in case of a decrease in the price of an asset. The decision to keep cash balances depends on the interest rate. If the current ... ... Dictionary-reference book on economics

DEMAND FOR MONEY, TOTAL- the sum of the demand for money for transactions and the demand for money from assets; the ratio between the total demand for money, nominal GNP and the interest rate... Big Economic Dictionary

Books

• Psychology of investments. How to Stop Doing Stupid Things with Your Money by Carl Richards. What this book is about About the connection between emotions and money. We all make mistakes, and some of them cost us dearly in the truest sense of the word. We sell assets if there is a panic in the market, ...
• Quick money in consulting How to start from scratch and start earning in 3 weeks, Parabellum A., Korobeynikova T., Savinov S. This publication is a unique instruction on how to become a business leader. Today, despite the great demand, the market for consulting services for small and medium-sized businesses is practically not filled, which,…

Demand for money(demand for money) is a general concept used in economic analysis to explain the desire of economic entities to have a certain amount of means of payment at their disposal, or the general need of the market for.

The demand for money is due to two functions of money - to be (that is, the money necessary to conclude transactions); be (that is, money is needed to accumulate and acquire new assets). There are various theoretical models of the demand for money - , - within which they analyze the various reasons that give rise to it.

Thus, J. M. Keynes (1883-1946) singled out three motives that generate the demand for money:

1. transactional (transactions motive) - the need for money as;
2. precautionary motive - the accumulation of money in case of unplanned expenses;
3. speculative motive - the demand for money to preserve wealth in the face of uncertainty about future interest rates.

Demand for money to make transactions- the amount of money that people want to have to use as a medium of exchange for making payments. The demand for money for making transactions changes in direct connection with the change in the nominal value.

Demand for money as an asset is the amount of money people want to keep as savings. The demand for money as an asset changes inversely. When interest rates are low or the opportunity cost of holding money is low, people prefer to keep more assets in shape. With high interest rates or high opportunity costs, liquidity is too expensive and people hold fewer assets in the form of money.

Demand for money for speculative purposes- the demand for cash balances that are held in liquid form, for their possible use with benefit when the price of an asset decreases. The decision to keep cash balances depends on the interest rate. If the current interest rate is high, people prefer to hold assets in the form of , rather than in the form of , due to the high opportunity cost of holding money and little risk of loss: the interest rate is unlikely to rise even higher and cause the bond price to decline. In other words, there is an inverse relationship between the price of bonds and . Speculative transactions are the result of expected price changes. If the interest rate is low and the bond price is high, people will prefer liquidity because of the low opportunity cost, the expectation of an increase in the interest rate, and the corresponding fall in the bond price. As a result, there is an inverse relationship between the interest rate and the demand for speculative balances. The speculative demand for money, along with the demand for money for transactions and the demand for money for unforeseen purposes, forms aggregate demand for money.

Interest elastic demand for money, is the demand for money, which is sensitive to changes in the interest rate.

Demand for money that is not elastic with respect to interest, is the demand for money, which is insensitive to changes in the interest rate.

Recognition of the existence of a stable demand for money formed the basis of the theory of monetarism. Based on this assumption, it can be shown that fiscal/fiscal policy is neutral, i.e. when government spending pushes interest rates up, private sector volume falls accordingly. Moreover, changes in the money supply are a necessary and sufficient condition for changes in the nominal value of gross domestic product, or changes in . However, in the course of econometric studies, it was not possible to reliably establish whether the demand for money is actually stable.

The demand for money has a different interpretation in different theories.

Monetarism considers money in circulation as the main instrument of macroeconomic analysis.

Within the framework of the quantitative theory of money, the demand for money is determined in accordance with the equation (model) of N. Fischer:

where M- the amount of money in circulation;
V- speed of money circulation;
Q- the number of goods sold;
R is the average price of goods and services.

After transforming the equation:

where MD- the demand for money.

If we assume that transactions are taken into account in , then P Q equal to nominal GDP. From here M V = GNP and beyond

The modern interpretation of the quantity theory of money by M. Friedman takes into account the demand for money of an individual, which is limited by the amount of his "portfolio of resources" - money and other assets:

where MD- the demand for money
R is the absolute price level;
Rb- the nominal rate of interest on bonds;
Re- market value of income from shares;
R- the rate of change in the price level in percent;
g- the relationship between human wealth (labor) and all other forms of wealth;
y- the total amount of wealth;
u- a value that reflects a possible change in tastes and preferences.

Modern monetarism has a rival theory of money - Keynesianism and neo-Keynesianism. Keynesian theory attempts to determine the demand for money based on the motives of the economic entity, which encourage him to keep part of his wealth in the form of liquid monetary assets. J. M. Keynes, as noted above, identifies such motives: transactional, speculative, precautionary. It is important that the subject cannot always determine what motives he is guided by in his demand for money.

Transactional is the motive for holding money, based on the convenience of using it as a means of payment. Precautionary is the motive for holding money in order to be able to make unplanned expenses in the future. Speculative is the motive for holding money, which arises from the uncertainty of the future market value and the desire to avoid losses.

Keynes believed that the demand for money depends on nominal income and the rate of loan interest: nominal income directly proportionally affects money demand, and the rate of loan interest is inversely proportional.

The main differences between monetarism and Keynesianism boil down to the following.

Unlike Keynesianism, which focuses on the regulatory role of the state, monetarists are closer to the old classical school and often reject government intervention in regulation.

Keynesians assign money a secondary role, monetarists believe that it is money circulation that determines the level of production, employment and prices.

Different positions in the interpretation of the velocity of circulation of the money supply. Monetarists believe that the velocity (V) is stable. But if the velocity of circulation of money (V) is stable, then from the equation (M · V = P · Q and further M · V = GNP) it really follows that there is a direct and predictable relationship between the money supply M and GNP.

Keynesians, on the other hand, believe that a change in the money supply first changes the level of the interest rate, then - and only through a change in nominal GNP is caused.

Monetarists believe that in a long-term policy, the state should ensure a reasonable constant increase in the money supply (M).

Unlike monetarists, Keynesians believe that the buildup is fraught with many negative consequences. If the supply of money grows, then the demand for them falls, and the price of a loan also decreases, i.e. interest rate, it ceases to respond to an increase in the money supply. As a result, the economy falls into and breaks the chain of causal relationships between the amount of money and nominal GNP. Therefore, unlike the monetarists, the Keynesians believe that the main means of stabilizing the economy is, and not.

Gradually, both of them give up their extreme positions, so the contradictions between them are smoothed out and in the field of the theory of money, a Keynesian-neoclassical synthesis arises, which is currently becoming dominant among economists.