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Chapter 13

The document discusses several key concepts related to money: 1) It defines the demand for money and how the demand curve is downward sloping as interest rates increase. 2) It explains that the supply of money is vertical as it depends solely on decisions by the central bank, not interest rates. 3) Monetary equilibrium occurs when the quantity of money demanded equals the quantity supplied. 4) It provides an overview of the quantity theory of money which states that prices rise when money supply increases and fall when it decreases.

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58 views2 pages

Chapter 13

The document discusses several key concepts related to money: 1) It defines the demand for money and how the demand curve is downward sloping as interest rates increase. 2) It explains that the supply of money is vertical as it depends solely on decisions by the central bank, not interest rates. 3) Monetary equilibrium occurs when the quantity of money demanded equals the quantity supplied. 4) It provides an overview of the quantity theory of money which states that prices rise when money supply increases and fall when it decreases.

Uploaded by

RomelEspera
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ROMEL ESPERA BSA-4

CHAPTER 13: MONEY GROWTH


The Demand for Money
-The demand for money is the relationship between the quantity of money people want to hold and the
factors that determine that quantity.

The demand curve for money illustrates the quantity of money demanded at a given interest rate.
Notice that the demand curve for money is downward sloping, which means that people want to hold less of
their wealth in the form of money the higher that interest rates on bonds and other alternative investments are.
The central bank controls the supply of money, and they interact with other financial institutions. This
interaction is part of the money market, and we can illustrate it using a supply curve.

The supply curve of money


-Shows the relationship between the quantity of money supplied and the market interest rate, all other
determinants of supply unchanged.

The supply curve for money illustrates the quantity of money supplied at a given interest rate, and
here's what that looks like. Notice that unlike a typical supply curve in the product market, the supply curve for
money is vertical, because it does not depend on interest rates. It depends entirely on decisions made by the
central bank.

Monetary Equilibrium
Equilibrium in the money market takes place when the quantity of money demanded is equal to the
quantity supplied.

Shift of Money Supply and Demand


Money supply shift to the right, demand for money remains the same. As a result, the value of money
decreases and the price level increases.

If the demand for money increases while the supply of money stays the same because investors are using it
for purchasing additional equipment used in factories, then the value of money arises, the price level drops, and the
quantity of money increases

The Quantity Theory of Money

The quantity theory of money argues that the size of the money supply influences the price of goods.
The quantity theory of money is a relationship among money, output, and prices that is used to study inflation.
It is based on an accounting identity that can be traced back to the circular flow of income.

The quantity theory of money says that prices rise when there is more money in an economy and
they fall when there is less money in an economy. The following formula expresses the theory:

MxV=PxQ

The quantity theory of money revolves around the basic idea that the more money people
have, the more they spend, and when more people are competing for the same goods and
services, they essentially bid the prices up for those things. This is the core of monetary theory.
Accordingly, when employment rates increase or the government cuts tax rates, people suddenly
have more money to spend. This, when not done in moderation, can create runaway inflation.

The velocity of money is the average frequency with which a unit of money is spent in
an economy

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