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Demand And Supply Of Money

 Money Market Symmetry, Demand and Supply of Money

Illustration 130

In the information provided below represents the prices of two different years. You are required to determine the following:

  1. Relative price proportion
  1. The index number of the year 2005

Commodity

Price in year 2000 per unit in $

Price in 2005 per unit in $

(A)

18

27

(B)

36

66

(C)

72

114

(D)

12

15

Solution

Commodity

Price in year 2000 per unit in $

Price in 2005 per unit in $

Price Relative
Computation

Value
In $

 

P0

P1

      1 = P1  x 100
             P0

 

(A)

18

27

     27  x  100
     18

150

(B)

36

66

      66  x  100
      36

183

(C)

72

114

      114  x  100
        72

158

(D)

12

15

      15  x  100
       12

125

       

ΣI = 591

Index number of the current year       =          ΣI
                                                                          N

Where, Σ denotes the sum, I for the price relatives and N represents the number of items.

Therefore,
                        Index number of 2005                        =          591      =          147.75
                                                                                                  4

In the above illustration, we have believed that all items are of same implication. This may not be the case. Consequently, in order to count the discrepancy among each item, it becomes mandatory to allocate credence to them. Then a weighted average of price relative is to be evaluated.

Money Market Demand

Illustration 131

The demand for money function is given as follows:

                        Md      =          1.8Y – 180i

Where earnings Y are million dollars and interest rate ‘i’ is percentage.

  1. Work out the demand for money when earnings rate i 6500 million dollars and the interest is 6.5 percent.
  1. Provided that level of earnings stays equal to $6500 millions, if interest rate of interest drops to 2 percent, how much does it have an effect on demand for money?
  1. If interest rate hikes to 10%, what will be the demand for money?

Solution

 (a)
                                    Md      =          1.8Y – 180i                 ………..Equation (1)

Substituting the values of Y and i in the equation, we obtain the following:

                                    Md       =          (1.8*6500) – (180*6.5)

                                                =          11,700 – 1170

                                                =          10,530

(b) When the interest rate declines to 2 percent, then we obtain the following:

                                    Md      =          (1.8*6500) – (180*2)

                                               =          11,700 – 360

                                               =          11,340

Hence, at a lesser rate of interest the demand for money to reserve is huge.

(c) When the rate of interest is 10 %, then we obtain the following:

                                    Md       =          (1.8*6500) – (180 *10)

                                                =          11,700 – 1,800

                                                =          9,900

Hence, at a higher rate of interest, the demand for money by folks will be lesser to have.

Supply of Money - Meaning

  1. The supply of money or supply of funds is a record at a definite summit of stage, though it articulates the concept of a flow over time.
  1. The words ‘the supply of finance’ parities with such terms as ‘currency inventories’, ‘means supply’ and ‘degree of money’.
  1. The supply of money are at instant is the collective size of money in the economic system. There are three substitute outlooks concerning the definition or process of funds supply.
  1. The most usual attitude is connected with the traditional and Keynesian over visions which damage the means of negotiability function of money.
  1. As per this impression, money supply is described as exchange with the public and demand deposits with commercial banks.
  1. Demand deposits are savings and current accounts of investors in a commercial bank.
  1. They are the rapid form of funding as the investors can sketch cheques for any number falling in their accounts and the bank has to make on the spot expending on demand.
  1. Demand deposits with commercial banks in addition to currency with the public are reciprocally denoted as M1, the money supply. This is measured as a thinner description of the funds supply.

Money Market Symmetry

Illustration 132

Specified demand for money function is Md = 0.9Y – 90i

Presume earnings of a nation’s economy to be $4,500 millions and the Central Bank has precise money supply paritying to 2,250 millions. With these facts determine the following:

  1. In case if the interest rate per annum is 7.2%, what will be the symmetry in the money market?
  1. Also in order to meet the symmetry level in the money market, decide whether the interest rate has to be turned down or improved.

Solution

The prime clause to be in symmetry has to be follows:

                                    Md      =          Ms

And the demand for money function is
                       
                                    Md      =          0.9Y – 90i

Given that interest rate i is 7.2% and earnings to be 4,500 million dollars

                                    Md      =          0.9(4,500) – 90(7.2)

                                    Md      =          4,050 – 648

                                    Md      =          3,402

3,402 is greater than 2,250, and hence, the particular money supply of $2,250 millions at 7.2 percent rate of interest, demand for money goes further than supply of money. This exceeds demand for money will be inclined to enhance in interest rate to the level where money demands parities the provided money supply.

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