Demand and Supply of Money

Introduction

• Money offers liquidity, which generates a trade-off between both the liquidity benefit of money and the interest benefit of other assets
• The quantity of money demanded varies in inverse proportion to the interest rate
• Money supply is the total quantity of monetary assets accessible in an economy at any one time, whereas money demand is the desired holding of financial assets

Demand and Supply of Money: 

A Detailed Analysis:

• Money is the most liquid of all assets and can be exchanged for other commodities very easily
• On the other hand, it has an opportunity cost of the interest foregone, that could have been earned by putting that money into for instance a Fixed Deposit, instead of holding it in cash
• While deciding on the amount of money to be held at a certain point of time, the consideration of the trade-off between the advantage of liquidity and the disadvantage of the foregone interest, has to be considered. As a result, demand for plutocratic equilibrium is sometimes referred to as liquidity preference
• Money is held for two broad motives: transaction motive and speculative motive

Transaction Motive: 

• The top subject for holding a capitalist is to bear out deals
• The expenditure pattern generally does not meet our receipts, that is the time at which money is received and the time at which expenditure transactions are conducted from that amount of money, are different
• For instance, a salary of Rs.100 is received on the first day of the month, but expenditures from this amount are evenly spread throughout the month 
• While transactions are conducted, money changes hands, that is, it moves from one entity to another  
• The composition of times a unit of plutocrat fluxes hands during the unit period is called the haste of rotation of capitalist
• The total value of annual transactions in an economy includes transactions in all intermediate goods and services and is much greater than the nominal GDP
• Still, typically, there exists a stable, positive relationship between value of deals and the nominal GDP
• An addition in nominal GDP implies an increase in the total value of deals and hence a lesser sale demand for capitalists
• Sale demand for capitalists is appreciatively related to the real income of a frugality and also to its average price position

Speculative Motive: 

• Speculation means the assumptions about the future value of a commodity/ asset etc 
• In case people in an economy have positive speculation about the future prices of an asset like say bonds etc. they would convert their current money holding into bonds, to make profits in the future
• However, if they speculate that the prices of bonds will go down in the future, they will convert their current bond holdings into money, to prevent future losses

Supply of Money: 

• The things that constitute money are as follows: 
• Currency notes and coins issued by the monetary authority of the country

• In India currency (notes) are printed by the Reserve Bank of India (RBI) 
• Coins are put out by the Government of India. In accordance with the Coinage Act, 1906, as modified from time to time, the Government of India is responsible for coinage
• The equilibration in savings, or current account deposits, held by the public in marketable banks is also considered plutocrat since cheques drawn on these accounts are used to settle deals

• Such deposits are called Demand Deposits, as they are available on demand of the account holder 
• Deposits having a fixed period to maturity for example fixed deposits 

Legal Definitions of Money Supply: 

• The value of the currency notes and coins is derived from the guarantee provided by the issuing authority (the RBI) 
• The value of the paper itself in a Rs.100 note is negligible 
• Currency notes and coins are thus called edict capitalist.  They don’t have natural value like a gold or grey coin
• Currency notes and coins are also called legal tenders as they can not be refused by any citizen of the country for agreement of any kind of sale 
• Cheques drawn on savings or current accounts, still, can be refused by anyone as a mode of payment. Hence, demand deposits aren’t legal tenders 
• The full stock of capitalists in rotation among the public at a particular point of time is called plutocrat force (Stock Variable)
• RBI publishes numbers for four indispensable measures of plutocrat force, 

• M1 = CURRENCY (NOTES PLUS COINS) HELD BY THE PUBLIC + NET DEMAND DEPOSITS HELD BY THE COMMERCIAL BANKS

• Note: Only deposits of the public held by the banks are to be included in money supply 

• M2 = M1 + SAVINGS DEPOSITS WITH POST OFFICE SAVINGS BANKS
• M3 = M1 + NET TIME DEPOSITS OF COMMERCIAL BANKS
• M4 = M3 + TOTAL DEPOSITS WITH POST OFFICE SAVINGS ORGANISATIONS (EXCLUDING NATIONAL SAVINGS CERTIFICATES)

• M1 and M2 are known as Narrow Money. M3 and M4 are also called as Broad Money
• These measures from M1 to M4 are in the decreasing order of liquidity (M1 being the most liquid and M4 being the least liquid). M3 is the most generally utilised measure of capitalist supply

Demonetisation:

• It’s a turn of calling off the legal tender status of a currency unit in rotation
• The Government of India, in the year 2016, demonetised currency notes of Rs 500 and Rs 1000, with an aim to tackle the problem of corruption, black money, terrorism, and circulation of fake currency in the economy

Some of the positive impacts of demonetisation: 

• Improved tax compliance. Savings of more individuals were channelized into the formal financial system
• Banks have additional coffers at their disposal which can be used to give further loans at lower interest rates
• Demonstration of State’s decision to put a check on black capitalist, showing that duty elusion will no longer be permitted
• Tax evasion will result in financial penalties and social condemnation.  Tax compliance will ameliorate and corruption will drop
• Homes and enterprises have begun to shift from cash to electronic payment technologies

Negative effects of demonetisation

• Effects on GDP
• It affected the small-scale business and wage workers
• Inflation occurs as a result of increased market liquidity

Conclusion

As a result, the demand for money is defined as the quantity of money that must be retained for various reasons. It’s worth remembering that in economics, demand for money refers to the desire for the current stock of money that may be kept. It is a money stock, not a money flow over time.