Assignment On:

Demand and Supply of Money

Course title- Macroeconomics
Course Code- MGT-210

Submitted To
Mohona Biswas
Assistant Professor
Department of Management
Rangamati Science and
Technology University

Submitted By

Md Maksudul Alam
Reg. No- 2018-25-15
2nd Year, 2nd Semester
Department of Management
Rangamati Science and Technology University

Date Of Submission- 07 July, 2021

What is Money?

Money can define as anything that is acceptable as a means of exchange and at the
sometime acts as a measure and store of value.

Function of Money:-

1) Commercial Function:

To provide financial services to the general public and businesses, to ensure

economic and social stability and sustainable growth of the economy. In this case,
credit creation is the most important task of commercial banks.

2) Social Function:

Social stratification is a social system in which a social group or society is classified

in a higher order on the basis of strength, property, social value and emotional
satisfaction.

3) Psychological Function:

Uncertain about the future, he wants to keep some of his assets in a liquid state.
Money is his most liquid asset. People carry cash to deal with future dangers and
uncertainties and feel safe.
What is Barter System?

The definition of barter is a system under which goods and services are exchanged instead
of currency, or the actual goods or services that are being exchanged.

An example of barter is bread provided in exchange for butter.

How Money removed the inconvenience of Barter System?

1) Money overcomes the problem of barter system by replacing the C-C economy with
monetary economy (where 'C stands for commodity).

2) When there was no money, it was difficult to give common unit of value to goods
or commodities, but when money was evolved, it gave a common unit of value to
ever goods and services.
What is Demand for Money?

The demand for money is the total amount of money that the population of an economy
wants to hold. The three main reasons to hold money, as opposed to bonds.

An example of this is ice cream. You can easily get a different dessert if
the price rises too high.

Types of Demand for Money:

1) Transaction Demand:
Money needed to buy goods – this is related to income.

2) Precautionary Demand:
Money needed for financial emergencies.

3) Asset motive/speculative Demand:

When people wish to hold money rather than buy assets/bonds/risky
investment.
 What is Liquidity Trap?

A liquidity trap is when monetary policy becomes ineffective due to very low interest rates
combined with consumers who prefer to save rather than invest in higher-yielding bonds
or other investments.

A liquidity trap isn't limited to bonds.

Significance the concept of Liquidity Trap

1) Rate of interest cannot be Zero:

Keynes's formulation of a liquidity trap refers to the existence of a horizontal

demand-curve for money at some positive level of interest rates; yet, the liquidity
trap invoked in the 1990s referred merely to the presence of zero or near-zero
interest-rates policies, the assertion being that interest rates.

2) Automatic Saving and Investment in Liquidity Trap:

A Liquidity Trap is when monetary policy becomes ineffective due to very low
interest rates combined with consumers who prefer to save rather than invest in
higher-yielding bonds or other Investment.
 What factors affect Demand?

 Price of the Product. There is an inverse (negative) relationship between the price of
a product and the amount of that product consumers are willing and able to buy.
 The Consumer's Income.
 The Price of Related Goods.
 The Tastes and Preferences of Consumers.
 The Consumer's Expectations.
 The Number of Consumers in the Market.

What is Supply of Money?

The money supply is the total amount of money cash, coins, and balances in bank accounts
in circulation.

For example, U.S. currency and balances held in checking accounts and
savings accounts are included in many measures of the money supply.
How cost of production factor affects Supply?

Producers with lower costs will always be able to supply more of a product at a given
price than those with higher cost. Conversely, if production cost increase, the quantity
supplied at a given price will decrease. Higher costs mean that producers will have to
produce less to be able sell a product at a given price.
Difference Components of Supply of Money:
What are the components that constitute supply of money?

1) Currency Notes:
Currency such as notes and coins with the people.

2) Demand Deposit:
Demand deposits with the banks such as savings and current account.

3) Short Time Deposit:

Time deposit with the bank such as fixed deposit and recurring deposit.

Components constitute the Supple of Money:

 Reasons for Change in Supply of Money
MMoneyMoney

1) Central Banks print more money.

2) Banks choose to hold a lower liquidity ratio. This means banks will be willing to
lend a larger proportion of their funds.

3) An inflow of funds from abroad. If the B of E has to buy the surplus pounds on the
foreign exchange to build up foreign reserves. This sterling will be used by
foreigners to buy UK exporters this will then be deposited in banks by the exporters,
credit will be created leading to a multiplied increase in the money supply. This will
only occur when the B of E attempts to maintain an e.r below the equilibrium

What is relationship between value of money and the price level?

Value of money is what one unit of money can buy and price level is the average of prices
of all the goods and services within an economy.
So, when the price level increases the value of money goes down and vis a versa. Hence
the relationship between price level in an economy and value of money is inverse.