It’s common sense that without money to use for goods and services, life for us can be really difficult. Therefore to use money, one must have money and the policies that govern the demand and use can vary. Factors that play into the public’s demand for money consist of; transactions demands, precautionary demand, and asset demand. Transaction demand involves the main reason people hold money, which is to purchase goods and services. Based on intervals of income received people will make purchases which can increase or decrease on a continuous basis. With the practice of holding money people will strategically make purchases to their convenience rather than using other monetary resources that will draw interest. Additionally, something that alters the quantity of money in rotation will have some affect on several industries and thus on basics of GDP.
So it makes sense that, as nominal GDP rises people will want to hold on to money to ensure they are able to make more purchases. People like me also find it prudent to hold on to emergency funds as a precautionary demand. The positive side to using this method is that people will have readily cash on hand. The negative aspect will cause a person to lose out on any interest earned; however in most cases the intent to put away emergency cash is measured against, the amount of interest rate they can make through putting their money away in a saving account. The more attractive interest rate offered the better justification in why an individual will not hold on to a greater amount of cash. When discussing savings we cannot overlook the need to hold money as a store of value, otherwise known as asset demand.
As I mentioned earlier households and busines...
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... key uses. It denotes an established standard used by the quantity theory of money, which communicates increases in the money supply to increases in the total level of prices. Additionally, solving the equation for 'M ' can serve as an indicator of the demand for money. This economic equation highlights the connection between money supply, velocity of money, the price level, and real GDP. The equation was developed by Irving Fisher, a well-known economist of the early 1900’s. The equation of exchange encompasses: M = money supply, V = velocity of money, P = average price level of goods, Y = real GDP per year. This formula is not a measured model that can estimate in measurable terms; however, it does provide a theoretical basis to help me realize the interaction of these four variables and gives one a feel for the trend, strength, or weakness of the economy.
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