Demand for Money and Supply of Money

Demand for Money and Supply of Money

The amount of money in an economy is shaped by two distinct forces: how much money people want to hold (the demand for money) and how much money is actually available (the supply of money). This section takes up each in turn, examining the demand for money in the next subsection and the supply of money in the one that follows.

The demand for money arises broadly from two motives. People hold money for the transaction motive — to carry out everyday purchases — and this demand rises with income and with the value of transactions to be made. They also hold money for the speculative motive, which depends on the rate of interest: when the interest rate is high, people prefer to hold interest-earning bonds rather than idle cash, so the speculative demand for money is low, and when the interest rate is low they hold more money instead. The total demand for money is the sum of these two components. …