Money demand theories being one of the most discussed topic in the field if finance which is mostly misunderstood by students. This occurs due to the lack of practical experiences and thus often leads to difficulties in solving money demand theory homework answers. Here I am going to discuss in brief, the basic facts about all the money demand theories that one needs to keep in mind while solving questions related to it.
How may demand for money arise?
Demand for money may emerge from two critical functions. Those two functions will be discussed in brief in this very article. The two main functions are that money is a store of significant worth and it also goes about as a medium of trade all over the world.
Because of these two reasons there was, is and will always be an ever increasing demand for money. Usually people who indulge in business aim to possess money both in the form of cash and valuable assets.
Understand why the gradual change in the demand for money
It is known to everyone that the demand of money is illustrated by quite a steep curve and it there have been quite a few speculations as to what causes the change the demand for money. Several experiments were performed and several observations were made. Out of those, two theories have stood up to the expectations of finance experts that actually explain the gradual change in money demand.
These theories are known as money demand theories. Understanding these would help one to easily solve money demand theory homework answers. The first theory to be discussed is the classical approach to demand for money.
This theory is nothing but Fisherâ€™s Transactions Approach. Fisher and other traditional financial analysts laid weight on the medium of trade capacity of cash, that is, cash as a method for purchasing products and enterprises. In the case of bookkeeping personality, to be specific esteem paid must equivalent esteem got is to happen, estimation of products, administrations and resources sold must be equivalent to the estimation of cash paid for them.
All kind of payment or transactions related to purchasing products needs cash as the method or mode of payment. Fisher formulated an equation known as the equation of exchange which is given by the formula:
M V = P T
Here M stands for the amount of money; V stands for the rate or velocity at which the money is being circulated; P stands for the level of price and T is the exact quantity of service or products that arebeing given in exchange for the cash. Manuals as money demand theory homework answers can help you get a better idea.
While the product of price level and amount of products and services illustrates the demand for money, the product of amount of money and the velocity at which it is being circulated gives nothing but the supply of money. Both sides of the equation form a balance and hence equilibrium is reached approximately. The equation may be written in a more evolved manner in the following way:
M d = P T
Here the demand is estimated by using the amount of income obtained from full employment. The traditional economists usually go by the rule that says that supply is responsible for the demand. This law is known to be Sayâ€™s Law. Hence in the above relations obtained by Fisher, the money is a constant proportion when associated with the level of transaction.
This approach is also known as the Keynesian approach. This approach was the first to introduce the term liquidity preference and classified the very motives of the cause of demand of money. The three main motives are the speculative, transaction and the precautionary demand. The transaction demands for cash emerge from the mode of trade capacity of cash in making consistent installments for products and ventures.
There will be that as it may, be changes in the transaction demand for cash contingent on the desires of salary beneficiaries and business people. They rely on the level of salary, the loan cost, the business turnover, the typical period between the receipt and payment of pay, and so forth.
Once the basic concepts are clear a student may attempt to try answering frequently asked questions on the topic. But the lack of experience in the right field often confuses them and leads to little or no understanding of the topic at all. For this reason, help is available instantly and in a very efficient way.
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