Demand for money is the need for a certain amount of money. It is determined by the amount of material assets of the company and the population who want to keep in checks and cash.
Demand for money is a natural occurrence in the market. Two approaches can be considered that explain it:
- classic (monetarist);
- Keynesian.
The classical approach determines the demand for money supply from the position of the equation: RU = MV, while M is the money in circulation, B is the speed at which money is circulated, P is the price index, and Y is the issue size. It must be borne in mind that speed is a constant value. When considering a situation in a long period, of course, B can change. For example, if new technologies appear in the banking sector.
From the above equation, we can conclude that the money supply depends on the dynamics of changes in GDP or RU. If this value increases by 3% over the year, then the demand for money will grow by the same amount. This means that the cash demand function is quite stable.
As in any market, along with needs, there are those who are ready to satisfy them. The money supply is rather unstable, it depends on the decisions of the government. But in accordance with classical theory, real GDP or Y, on the contrary, changes slowly. A significant role here is played by production factors, which are usually quite stable in the short term. Therefore, a change in the money supply is best considered within one year or more. This indicator has a significant impact on the price level and has practically no effect on employment. This phenomenon in the economy has been called monetary neutrality. The rule of the monetarists states that the state should strive to maintain the growth rate of the mass of money at the level of GDP. Then their supply will correspond to demand, and prices in the economy will be stable.
Quantitative theory explains two motives for money demand. The first of these is that companies and people need cash, as it is a transaction service tool. The purchase of goods or services occurs mostly when exchanging them for banknotes and coins. Less often, the buyer and seller use barter - the exchange of goods (services) for another goods (service). The need for funds for purchases is called the demand for money for transactions. Consider several factors influencing it:
- the volume of goods currently on the market;
- price level for services and goods;
- the speed of money circulation ;
- national income.
But the greatest impact is the level of income: M = Ufakt. Here M is the demand for money, Ufakt. - national income.
The second motive of monetary demand is related to precautionary purchases. It arises in connection with the fact that people often have to deal with payments that they could not have foreseen before. Therefore, they should always have at least a small supply of cash. Monetary demand, according to the above formula, is directly proportional to national income.
Both motives of money demand do not depend on the interest rate. On the graph, the demand line looks like a straight line located vertically.
Keynes identified the third motive for keeping money - speculative. It implies that if you keep the savings at home, then the owner misses a possible profit. That is, money could be invested in less liquid assets, but more profitable. The demand formula looks like: M = Ifact. Here is Ifact. - interest rate level. The relationship between these indicators is directly proportional. Graphically, the speculative demand line is a curve with a negative slope.
Money supply in the country is controlled by the Central Bank. It is necessary that the purchasing power of money is at a stable level.