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Money Demand and Money Supply - Coggle Diagram
Money Demand and
Money Suppl
y
Components of
Money Supply
M1
Narrow Range Money
(transaction money, in active circulation)
Examples of M1:
Currency & Coins
Traveler's Cheques
Current Account
M2
Medium Range Money
(can easily convert savings to M1)
Examples of M2:
M1+
Currency & Coins
Traveler's Cheques
Current Account
Fixed Deposit
Saving Deposit
Short-term time deposits.
M3
Wide Range Money
(less liquid, long term net deposits)
Examples of M3:
M2+
Short term securities
repurchase agreement
Factors affecting Money Demand
Price Level
(Impact on quantity)
Higher the price level, the higher money demand
(Impact on demand curve)
Change in price level causes a
shift
of the money demand curve
Real GDP
(Impact on quanitity)
Increase in real gdp, increases the demand for money
(Impact on demand curve)
Change in real gdp will cause a
shift
of the money demand curve
Interest Rate
(Impact on quanitity)
Rise in interest rate, rise in opportunity cost of holding money, quantity of money demanded decreases
(Impact on demand curve)
Change in interest rate causes a
movement
along the money demand curve
Financial Innovations
(Impact on quantity)
Lower the cost of switching between money, decreases the demand for money
(Impact on demand curve)
Change in financial innovation will cause a
shift
of the money demand curvey
Motives for Money Demand
Transaction Motive
Hold money to carry out daily transaction
Affected by level of national income, expected future, income and prices.
Speculative Motive
Hold money while waiting to invest in other financial assets
Affected by interest rates, asset prices and future prices
Precautionary Motive
Hold money for unexpected needs
Affected by natuinak income, future transactions and income & prices
Quantity Theory of Money
M x V = P x Y
M= Money supply
V = Velocity of money
P = GPL
Y = Real GDP
The higher the money supply, the higher the price level
(Equal % Increase)
Long Run
V is constant as veloctiy is predictanle
Y is constant at full employment