Question

List four factors that can cause a shift in money demand​(Select all that​ apply.)

A.Open market sales

B.Changes in the real wage

C.Changes in the quantity of government spending

D.Open market purchases

E.Changes in current taxes

F.New information technologies

G.Changes in government regulations

H.Changes in the circumstances in the banking system

I.Changes in the perceived riskiness of banks

Answer 1

Money demand is the need to hold money as cash for various purposes—merely as idle balances, or for any emergency perceived or for every day buying and selling purposes .

A. Open market sales :

     The sales of bonds, stocks, securities in the open market by the central bank as a part controlling the financial activity, the selling of government securities and stock especially during periods of prosperity or higher level of economic activity will lead to lower demand for money as people will want to invest in the bonds. This is an attempt to reduce unwarranted inflationary pressures in the economy.

B. Changes in real wage:

           Real wages mean the amount of goods and services that people can buy with a given level of money income. It is the wage level that has been adjusted for inflationary trends. This will affect the money demand—consistent economic growth will lead to higher purchasing power for the individuals and hence will increase the demand for money. On the other hand, lower the real income lower will be the demand for money since price levels would be higher than the money wages and hence people will restrict their purchases of goods and services.

C. Changes in quantity of government spending:

      Higher public spending will lead to higher levels of income and employment opportunities, this will increase the aggregate demand for goods and services leading to a rise in the demand for money. Incidentally higher public spending will also accelerate the investment expenditure by firms.

        A fall in public spending will reduce the income and employment levels. This is a strategy that is generally followed in times of higher inflation when there is excess demand for goods and services as also very high speculative activities. This may force people to keep more money as liquid due to the prevailing uncertainty.

D. Open market purchases:

        During a period of monetary expansion, open market purchases are undertaken by the central bank from commercial banks and money and capital markets—this will ‘pump’ money into the sagging economy and is a measure that is expected to raise aggregate demand. More money will be available in the hands of the public , demand for money will rise, leading to an upward trend in the economic activity.

E. Changes in current taxes:

            Higher taxes, especially on higher incomes and on luxuries consumed by higher income groups will reduce the disposable income in the hands of the public and thereby lower the money demand.

      On the other hand , when there is a need to stimulate aggregate spending in the economy and curtail recessionary trends, a fall in the tax rates , especially income tax and other direct taxes will rise the disposable incomes in the hands of the people and thereby raises the need for holding more money as liquid.

F. New Information technologies:

This will lead to better production techniques, it will increase the investment expenditure by firms, though will not have an effect on the money demand especially on consumers.

G. Changes in government regulations:

                        Governmental regulations like lower margin requirements ( monetary policy measure ) , more subsidies, lower indirect taxes will increase the demand for money for various purposes especially for transacting purposes. Hence the demand for money will rise.

      On the other hand, a tight policy followed in order to regulate spending in the economy especially a policy of higher import duties, import restrictions along with domestic controls will lead to lower demand for money.

H. Changes in banking circumstances:

                        Money demand depends upon the banking habits and the accessibility of banks to the public. In advanced countries the public use banking more regularly and is more accessible than in developing countries where banking is not very popular .

A more accessible banking structure, with attractive interest rates will induce people to hold less money in hand, on the other hand inadequate banking structure will lead to higher idle balances.

I. Changes in perceived riskiness of banks:

       If the banks and their activities are perceived as risky and leading to losses or in case the interest rates are too low for people to hold as deposits in the banks, more money is kept aside as liquid cash until ‘certainty and stability ‘ regains in the banking structure.

A healthy banking atmosphere will reduce the money demand and will encourage public to hold more money in the form of bank deposits. This will lead to higher investment and capital formation and will act as a stimulating factor to the overall economic growth.