It will be useful to have an idea of the demand for and the supply of money. The reason for this inverse correlation between money held for speculative motive. The relationship between demand and supply underlie the forces behind the ( To learn how economic factors are used in currency trading, read Forex. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will.
Your new equilibrium price of money, the rent on money, or the interest rate on money is now lower. That's why when the Federal Reserves say I want to lower interest rates, they do so by printing money. They print that money, and they lend it out in the market.
That essentially has the effect of lowering interest rates. Let's think about another situation.
Money supply and demand impacting interest rates (video) | Khan Academy
Let's say this is the Fed prints and lends money. Their lending the money by buying government bonds. When you buy a government bond, your essentially lending that money to the Federal Government. I've done other videos on that where we go into a little bit more detail on that. Let's think of another situation. Let's think about consumer savings go down. One interesting thing about savings, savings and investment are two opposite sides of the same coin.
When you save money You have the whole financial system right over here. This is the finincial system. That money goes out and is lent to other people. For the most part, hopefully, that money when it's lent is used to invest in someway.
If consumer savings goes down that means the supply of money will be shifted to the left. At any given price and any given interest rate their be less money available. In this situation our supply curve is shifting to the left. That would increase interest rates. Then you could even make an argument that if consumers savings is going down consumers are going to borrow less as well. You could argue that maybe demand would go up as well.
Your demand could go up and that would make the equilibrium interest rate even even higher.
Let's do another scenario. Let's say that the Federal Government in an effort to The government decides to borrow a lot more money. The government is essentially going expand it's deficit.
The government is going to borrow money. Here our supply isn't changing.
Demand for and Supply of Money – Discussed!
Now a word about each one of them. This motive can be looked at: Most of the people receive their incomes by the week or the month, while the expenditure goes on day by day. A certain amount of ready money, therefore, is kept in hand to make current payments. The businessmen and the entrepreneurs also have to keep a proportion of their resources in ready cash in order to meet current needs of various kinds. They need money all the time in order to pay for raw materials and transport, to pay wages and salaries and to meet all other current expenses incurred by any business of exchange.
It is clear that the amount of money held, under this business motive, will depend to a very large extent on the turnover i. The larger the turnover, the larger in general, will be the amount of money needed to cover current expenses.
The amount of money held under this motive will depend on the nature of the individual and on the conditions in which he lives. The notion of holding money for speculative motive is a new typically keynesian idea.
Demand for and Supply of Money – Discussed!
Money held under the speculative motive serves as a store of value as money held under the precautionary motive does. But it is a store of money meant for a different purpose. The cash held under this motive is used to make speculative gains by dealing in bonds whose prices fluctuate.
If bond prices are expected to rise, which in other words means that the rate of interest is expected to fall, businessmen will buy bonds to sell when the price actually rises. Effect of Variations Demand increases with the supply remaining the same leads to shortage while demand decreases with the supply remaining the same leads to surplus. Supply increases with the demand remaining the same leads to surplus while supply decreases with the demand remaining the same leads to shortage.
Money supply and demand impacting interest rates
Impact of Price With an increase in price the demand decreases and vice versa i. Supply increases along with the increase in price. So it has a direct relationship.
Supply represents the firm. The quantity how much of the product is demanded at a certain price, i. Demand curve is an indicator of inverse relationship between price and quantity demand.
Definition of Supply The amount of a particular product and services offered by the manufacturers or producers at a certain price to customers is known as supply. The quantity how much of the product is supplied at a particular price i.