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 …show more content…
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 further in the Baumol-Tobin model. The BT model is an economic model which relies on the trade off between liquidity provided by holding money as well as the interest forgone. The main variables in the model are nominal interest rates and real income. The formal exposition onf the model is shown …show more content…
Members of the UK may have been skeptical about the future, incentivising them to save money. There may be speculation about goods falling in prices that can lead to people holding off on purchases. Another reason why the interest rates the bank of England set may not be effective is because consumers don’t borrow directly from the B of E. If retail banks do not pass on these savings in the cost of borrowing to consumers then we are unlikely to see much of a reaction. Banks may hold off passing on the savings for a number of reasons for instance a lack of confidence in the economy or doubts that they will get their money back will make them more reluctant to lend. Speculation about the future value of the currency is another factor which can offset the effect of interest rates. If traders anticipate the value of the pound to decline then the demand for sterling is likely to fall assuming ceretus
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 …show more content…
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 further in the Baumol-Tobin model. The BT model is an economic model which relies on the trade off between liquidity provided by holding money as well as the interest forgone. The main variables in the model are nominal interest rates and real income. The formal exposition onf the model is shown …show more content…
Members of the UK may have been skeptical about the future, incentivising them to save money. There may be speculation about goods falling in prices that can lead to people holding off on purchases. Another reason why the interest rates the bank of England set may not be effective is because consumers don’t borrow directly from the B of E. If retail banks do not pass on these savings in the cost of borrowing to consumers then we are unlikely to see much of a reaction. Banks may hold off passing on the savings for a number of reasons for instance a lack of confidence in the economy or doubts that they will get their money back will make them more reluctant to lend. Speculation about the future value of the currency is another factor which can offset the effect of interest rates. If traders anticipate the value of the pound to decline then the demand for sterling is likely to fall assuming ceretus