Interest Rates And The Demand For Money Essays

1063 Words Dec 17th, 2015 null Page
The demand for money is the desire to hold a stock of money as opposed to other monetary assets such as government bonds. Individuals tend to demand money for its liquidity and ease in which it can be exchanged for goods. Obviously how much demand there is for a currency effects other aspects of the economy, one example being inflation. In this essay the link between interest rates and the demand for money will be discussed as well as how interest rates can be used to influence the demand for money.

The relationship between interest rates and the demand for money is generally negative, meaning as interest rates fall people will forgo holding cash and demand other assets which give them a better return on their money. In the recent great recession the Bank of England lowered its interest rates to 0% in an attempt to reduce the demand for money, encourage spending, investment and overall consumption. Reducing the interest rates increases the amount of disposable income for home owners on a variable mortgage. This in theory should increase the household’s consumption assuming their marginal propensity to consume remains the same.

Keynes argued there are three motives for holding money. Firstly the transaction demand, which is generally cash or debit, accounts for general day to day spending. Although individuals tend to get paid only once a month is it assumed that they wish to make purchases throughout the whole month and therefore money is necessary. This is explained…

Related Documents