What are the determinants of the demand for money?
There are three aspects to the demand for money. Consumers and firms demand money in order to conduct transactionsthe transactions demand for money, to take care of emergenciesthe precautionary demand for money, and to be able to take advantage of a fall in the price of an asset that they wantthe speculative demand for money. The amount of money held depends on the interest rate and nominal income. Increases in nominal income generate a greater volume of transactions, so more money is needed. The demand for money is therefore positively related to nominal income. The interest rate is the opportunity cost of holding money. A higher interest rate means that it costs more to hold money, so less money will be held. The demand for money is negatively related to the interest rate. • How does monetary policy affect the equilibrium level of real GDP? Monetary policy refers to controlling the money supply. An increase in the money supply decreases interest rates, which increases consumption and
