Using this approach, Friedman specifies the following as the key determinants of this demand for money: This is the analogue of the budget constraint in the usual theory of consumer choice. Preferences also play a role in determining the demand for money. Inducement to invest:What are the basic determinants of investment?

In general, the demand for money will increase as it becomes more expensive to transfer between money and nonmoney accounts. The quantity of money people hold to pay for transactions and to satisfy precautionary and speculative demand is likely to vary with the interest rates they can earn from alternative assets such as bonds. This assumption is commonly made in deriving almost all macro relations from their micro counterparts. Copyright. Copyright 10. Content Filtrations 6. How is the speculative demand for money related to interest rates? Due to difficulty of getting estimates of total wealth, Friedman substituted permanent income (Y) for wealth in his demand- for-money function. They will hold smaller speculative balances. Toward the end of the great German hyperinflation of the early 1920s, prices were doubling as often as three times a day. Total wealth, 2. If prices rise very rapidly and people expect them to continue rising, people are likely to try to reduce the amount of money they hold, knowing that it will fall in value as it sits in their wallets or their bank accounts. The relationship between interest rates and the quantity of money demanded is an application of the law of demand. The nominal rate of return on money may be zero as on currency or positive as it is on savings deposits, a large part of which is counted as demand deposits, or even negative, if current-account deposits are subject to net service charges. The demand for money will fall if transfer costs decline. When interest rates rise relative to the rates that can be earned on money deposits, people hold less money. 2. One reason people hold their assets as money is so that they can purchase goods and services. It seems likely that if bond prices are high, financial investors will become concerned that bond prices might fall. That will shift the supply curve for bonds to the right, thus lowering their price. The demand for money is the relationship between the quantity of money people want to hold and the factors that determine that quantity. When interest rates fall, people hold more money. In deciding how much money to hold, people make a choice about how to hold their wealth. After 10 days, the money in the checking account is exhausted, and the household withdraws another $1,000 from the bond fund for the next 10 days. The household could also maintain a much smaller average quantity of money in its checking account and keep more in its bond fund. However, instead of worrying about $3,000 per month, even a relatively small firm may be concerned about $3,000,000 per month. The division of wealth between human and non-human forms, 3. http://2012books.lardbucket.org/books/macroeconomics-principles-v1.0/s13-02-demand-supply-and-equilibrium-.html, CC BY-NC-SA: Attribution-NonCommercial-ShareAlike. Total wealth, 2. Under those circumstances, people tried not to hold money even for a few minutes—within the space of eight hours money would lose half its value! In the absence of slavery, no market price for human capital exists and thus a rate of return on this form of wealth cannot be computed directly. The nominal rate of return on money may be zero as on currency, or positive as on saving deposits or even negative if current account deposits are subject to net service charges. Figure 10.8 “An Increase in Money Demand” shows an increase in the demand for money. The speculative demand for money is based on expectations about bond prices.

Some of the key determinants of demand for money specified by Friedman are: 1. Permanent income is the expected income flow from total wealth. Before publishing your articles on this site, please read the following pages: 1. Therefore, Friedman introduces the ratio of non-human to human wealth (w) as a variable in the demand function.

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