Money needs a store of value to hold its value over time and to remain the medium of exchange. If there is no store of value for money, then it will lose its importance as a medium of exchange.
Although it does not have the uniqueness as a store of value and people have other options, but its liquidity gives it and edge and preference over other stores of value as it is readily accepted and available and can be easily transported.
As a unit of account money provides valuable information and helps in decision making. It helps the supplier in deciding the rate of supply and the buyer to calculate the demand and the measuring their values in terms of price or money. The uncertainty of the future, the inflation and the interest rates and not to forget the level of income are factors that greatly influences the demand for money.
The three motives that creates the demands are briefly explained below. Since the availability of money is prominent for transactions so its demand cannot be sidelined. With the passage of time, transactions tend to increase and so will the income rise with a rise in the GDP and that directly increases the transaction motive. As mentioned above that the uncertainty of future influences the demand for money. Precautionary motive require demand for money whenever there is some unexpected payment to be done.
The value and demand of an asset heavily depend on its opportunity cost and the rate of return. Money is also an asset, but results in depreciation during inflation and will provide no rate of return no matter for how long its been saved or holding it. The legislative branches of the government hold and implement the fiscal policy for every country.
Government expenditures and the taxes are defined as the two main instruments of the fiscal policy because government needs to finance the expenditures that it undertakes to fulfill the demand of goods and services of people and to finance those expenditures it collects taxes from the people. The government can either be in deficit or surplus depending the number of people paying the taxes.
When the payments surpass the expenses, the government stays in budget surplus, but if the case is opposite, i. To fulfil or overcome that deficit in the budget, the governments borrow money or take loans from other nations or international financial institutions like the world bank and IMF thus increasing the national debt.
Governments taking loan from other nations for the fulfilment, expenses continuously increase the national debt and stays in the credit line because the money supply stays constant.
With loans comes interest that shows an increasing trend thus resulting in increase debts. This situation eventually gives rise to aggregate demand and country has to deal with inflation that brings its own charms and result in making the situation even worse. So keeping the national budget balanced a government needs a balance in income and expenses. When the banks need to borrow the reserves to meet their reserve requirements, the central bank charges the interest known as the discount rate.
The flow of many depends heavily on the discount rate. Banks will hold the money flow if the central bank sets the discount rate high on the other hand low interest rate will encourage the smooth flow of money and encourage the investments. When the central bank is using its instruments of monetary policy to increase the supply of money, it is said to follow the expansionary monetary policy.
To the contrary, if the central bank is reducing the supply of money using the instruments of monetary policy it is undergoing contraction monetary policy.
This theory provides the information that the quantity of money and the price level are directly proportional; i. You must be logged in to post a comment.
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