Question

All else being equal,how would this affect demand for narrow money and broad money?

The stock market crashes ,and further sharp declines in the market are widely feared

Answer 1

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Question:

Answer:

Demand of Money: It is desire holding of cash or cash equivalent financial instruments ( Saving deposit, money market instruments etc) by the people.

People demand money for the following reasons: a). for buying the goods and services, b). for emergency and c). for ultra of very short-term investment.

Narrow Money: It is the most liquid form of money and have 100% quick liquidity without any depreciation of value like, cash, notes etc.

Broad Money: This is more than narrow money plus the financial Instruments that can immediately convert into currency and ready to use for transactions like, saving accounts and deposits etc.

Impact of Demand of Money when stock market crash:

Stock market is the best indicator of health of economy. Its crash means economy in trouble or in bad shape or situation. A bad health of economy means lower the GDP growth rate, low level of employment growth, lower the consumer confidence, low income level and lower the level of investment and consumption. So, lower the consumption and investment level with lower the consumer's and investor's confidence level reduce the demand of money.

The further sharp declines in the market means economy has crashed or in recension phase where GDP is falling sharply, people are losing their job, investors are in fear and very uncertain about the future, consumers has no money to spend, returns on investment declining/decreasing sharply, prices of goods and services has declined. So, consumers don't buy more and stop the further investment because of negative of the very low returns and hold the cash in their pocket. So, its also affect the demand of money negatively and reduce it.

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