Demand function for money, Managerial Economics

Demand Function for Money

In the Keynesian analysis , the demand for money is a function of the level of income and the rate of interest. According to Milton Friedman, the demand for money is a function of the following six factors:

1. The rate of return on bonds higher is the rate of return on bonds smaller is the demand for money.

2.The rate of interest on equities (stock) higher is the rate of return on stock, lower is the demand for money.

3.The rate of change of prices. If the price are rising at rapid rate, people would economise on their holdings of money in order to avoid a fall in the real purchasing power of their money holding. consequently, the demand for money holding is negatively related to the rate of change of prices.

4. The ratio of non human to human wealth. Human capital is embodied in the individual in the form of investment made in education, skills .etc. which enables an individual to produce future returns. Non human capital represents ownership of income yielding physical assets ownership of land house, machine etc. A change in the proportions of the total wealth held in these two forms will changes the demand for money.

5.Real income Y/P also affects the demand for real cash balances M/P.

6.Tastes and preferences of the wealth holders, economic and non economic conditions also affect the demand for money by influencing the desire of the people to hold money. According to Milton Friedman, uncertainty and geographic mobility act as the possible causes for an increase in public liquidity preference or demand for money.

Posted Date: 12/1/2012 5:09:08 AM | Location : United States

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