The demand for money and money supply

%

Dtr

10 20 30 M

Fig. 22. The demand for money for transactions

Households need a certain amount of money for the purchase of essential goods, and businesses - to pay wages and electricity costs, materials, etc.

B. The demand for money from the assets - a consequence of the functionality of the savings. The level of demand depends on the price (interest rate level) in cash assets.

%

Dа

M

Fig. 23. The demand for money from the assets.

Companies and individuals can keep their assets in various forms - stocks, bonds, money. Each of them has its pros and cons.

Money - the liquid, but do not give a percentage of income. Shares carry a dividend, but not have the ability to access funds.

The answer to the question: how many financial assets to keep the money, and how much in bonds? - Is the value of the interest rate (the relationship is inverse).

The total demand for money is: Dо = Dtr + Dа

% D2 D0 D1

М

Fig. 24. The total demand for money

If growing GNP, all other things being equal, demand schedule for money (D1) will move to the right, if GNP will decline, the D2 moves to the left.

What determines the supply of money?

The main sources are:

1. Central (national) bank directly controls a large part of the money supply. Because of certain political decisions, he controls the issuance of money.

2. Commercial banks. Providing loans to businesses and households for purchases, accelerating the movement of commodities, money, which, in turn, re-fit on the new bank account? Addition of money commercial banks provides the ability to issue more loans.

3. National Bank may affect the money supply through the purchase - sale of securities.

4. Currency movement abroad and because of her. The higher the interest rate in the country compared to the surrounding countries, the greater the flow of money from abroad. Likewise, the low interest rate leads to a reduction in leakage rates and the money supply.

Of what elements is the proposal?

Are the following: