DEMAND

FOR
MONEY
Tugas Makroekonomi
Dosen : Dr. Azwardi, S.E., M.Si.

Penulis : Septiyah
Why do people hold money?

• People tend to carry some money around with them for

the purpose of making purchases more convenient. We
call this the transactions motive.

• At other times, people hold more or less cash than usual,

depending on their expectations about the economy. We
call this the speculative motive.
 Money Demand

When we analyze money demand, we must have some way of representing

the money balances that people hold for transaction purposes.
The term we will use is real money balances.
 Real Money Balances

• Because we recognize that the “value” of money depends on how much it will buy at
the current price level, we must include a term for the price level in our analysis.
• Real Money Balances = Money supply/Price level or M/P
 the individual's demand
for money functions

With no risk case

When r is greater than rc, the asset holder puts all of into bonds, so that his
demand for money is zero
The Agregate Demabd-for-money
function with regressive expectation

The Individual demand curves can be agregated for the entire money market as
follows. Locate the indiidual with highest critical interest rate, rcmax
The Portofolio Balance Approach

The portofolio balance approach begins with the

same expression for total percentage return e
e=r+g
In that section we assumed that the percentage
rate of expected capital gain. given by
The Individual'sportofolio Decision
The Agregate Demand For Money In
The Portofolia Balance Model
The Transaction Demand For Money
 The Velocity of Money

We also recognize that a given stock of money (the actual, physical bills and coins) changes
hands many times over a given period.
Irving Fisher (Yale) developed a model of money demand which includes a term for velocity,
which is intended to represent the number of times a dollar is spent in the economy in a year.

Velocity is defined as:

V = PY/M
Where: V = Velocity P = Price level Y = Output (Income) M = Money supply
 The Velocity of Money and the
Equation of Exchange

V = PY/M
If we multiply both sides of the equation by M,
we get
MV = PY We call this the
“equation of exchange.”
The Equation of Exchange

The equation of exchange serves as the basis for the quantity theory of
money.
We can rearrange MV =PY to get: M/P = (1/V)Y
• This equation says that real money balances depends on Y (income).
• This makes sense because as people’s real incomes rise they tend to
spend more, so will demand more money for transaction purposes.
• The same holds true if we “aggregate” individuals into the entire nation.
• Essentially, the quantity theory of money says that money demand is
driven by transactions!