how is demand for money affected by risk, liquidity and expected return of monetary and non...

how is demand for money affected by risk, liquidity and expected return of monetary and non monetary assets?

Expert Solution

DEMAND FOR MONEY IS AFFECTED BY RISK AS SOME PEOPLE WANT TO HOLD BONDS INTEAD OF MONEY AS THEY PAY RETURNS IN THE FORM OF HIGHER RETURNS BUT MONEY IN HAND PAY NO INTEREST SO BASICALLY IF WE DEMAND FOR MONEY WE HAVE TO FORGO THAT INTEREST.

BUT SOMETIMES PEOPLE EXPECT THAT AS BONDS PAY INTEREST BUT THIER VALUE CAN ALSO FALL LAEDING TO LOSS OF MONEY SO IN SUCH CASES THEY DONT WANT TO TAKE RISK AND DEMAND MORE MONEY WHICH LEADS TO A SHIFT IN DEMAND CURVE FOR MONEY TOWARDS RIGHT.

WHEN WE TALK ABOUT LIQUIDITY ,IF A PERSON PREFERS MORE LIQUIDITY THAT IS KEEPING THE MONEY IN HAND MORE THEN THAT CAN BE DUE TO SPECULATIVE MOTIVE,TRANSACTIONARY MOTIVE,PRECAUTIONARY MOTIVE SO MORE LIQUIDITY IS DEMANDED THEN MORE MORE IN HAND WHICH MEANS MORE DEMAND FOR MONEY .

IF THE EXPECTED RETURN FROM MONETARY AND NON MONETARY ASSETS IS MORE THEN A PERSON PREFERS TO INVEST THE MONEY IN SUCH ASSETS AND THEREFORE LESS DEMAND FOR MONEY

Rahul Sunny answered 2 years ago

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