One cannot sort through someone’s checking account and locate which funds are held for transactions and which funds are there because the owner of the account is worried about a drop in bond prices or is taking a precaution. 4. One way the household could manage this spending would be to leave the money in a checking account, which we will assume pays zero interest. One such variable suggested by Friedman is ‘the degree of economic stability expected to prevail in the future’. Will this demand also be affected by present interest rates? Among the most important variables that can shift the demand for money are the level of income and real GDP, the price level, expectations, transfer costs, and preferences. Money held for precautionary purposes may include checking account balances kept for possible home repairs or health-care needs. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times. The nominal rate of return on other assets consists of two parts: first, any currently paid yield or cost, such as interest on bonds, dividends on equities and storage costs on physical assets, and second, expected changes in their nominal prices. 3. If people expect bond prices to fall, for example, they will sell their bonds, exchanging them for money. Such a curve is shown in Figure 10.7 “The Demand Curve for Money.” An increase in the interest rate reduces the quantity of money demanded. A bond fund is not money. At low interest rates, a household does not sacrifice much income by pursuing the simpler cash strategy. The quantity of money demanded at interest rate r rises from M to M′. Or, more correctly speaking, he had treated bonds as representing all long-term financial assets.
To see why, suppose a household earns and spends $3,000 per month. In recent years, transfer costs have fallen, leading to a decrease in money demand. All the articles you read in this site are contributed by users like you, with a single vision to liberate knowledge. According to him, wealth-holders are likely to attach considerably more value to liquidity when they expect economic conditions to be unstable than when they expect them to be highly stable.
It seems likely that if bond prices are high, financial investors will become concerned that bond prices might fall. The Demand Curve for Money. It is the total that must be divided among various forms of assets. Total wealth, 2.
The household has $1,000 in the fund for 10 days (1/3 of a month) and $1,000 for 20 days (2/3 of a month).
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