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Money and credit - Ivanov V.M.


9.1. Money Demand Concept

The concept of " demand " is fundamental for all sectors of the economy. In the general understanding of the law of demand, people buy more goods as the price of this product decreases.

Common sense dictates that, obviously, there is a demand for such a specific product as money, since money “can” be almost everything and people are ready to donate a lot for it. But in this case, the concept of demand is considered in its narrower meaning. In this regard, certain difficulties arise when applying the law of demand to a specific concept of money, namely: it is not known what is meant by the “price” of money, how to measure the amount of demand for money and what factors fall under the definition of “all other things being equal” when It's about the demand for money.

When considering this issue, the concepts of "money" and "wealth" should not be confused.

Wealth is all that a particular individual possesses, including equity, bonds, real estate.

Money in the framework of the M1 aggregate - cash and demand deposits - is one of the forms that wealth takes.

To denote the totality of assets that make up the wealth of an individual, the concept of "portfolio" is used. Hence, the question of demand for money can be transformed into the following: what part of their portfolios do people want to keep in liquid form, and not in other types of assets. It also means that the demand for money should be seen as the demand for a stock of money, measured at a certain fixed point in time.

The reasons for the existence of demand for money stem from the functions of money. People need money as a medium of circulation, that is, a convenient tool for concluding transactions for the purchase of goods and services. Money is a unit of account, allowing you to measure prices and income. They serve as a store of value as one of the assets of storing part of wealth. Money is also a means of payment in settlements under contracts.

Only by clearly imagining the many factors that motivate people to strive for money can we understand how changes in the amount of money in circulation affect the state of the economy.