Learn with steem: The Demand and Supply Of Money- Hidden facts you should learn

Hello friends,
It is my pleasure to come before this great community again, a community with active and hard-working moderators.

Today we shall be learning about the demand and supply of money.
We shall be discussing the various reasons individuals hold wealth in the form of money, and finally we shall examine the determinant of money.

Please follow along as we begin.

WHAT IS MONEY

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Money as it is popularly known is anything that is generally accepted as a medium of exchange in a particular area.

It can also be said to be a medium whereby values and prices are expressed as currency and it circulates from person to person, state to state and nation to nation, thus aiding trade in the world.

DEMAND FOR MONEY

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The demand of money can be said to be the total amount of money in which various individuals in the economy want to hold for various reasons.

It can also be said to be the desire to be in the possession of money, that is storing one's valuable items in liquid form rather than spending it.

In Economics as a field of study, demand for money can be known as liquidity preference

WHY PEOPLE HOLD MONEY

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Of course, there are numerous reasons why money is held by different individuals.

According to Lord Keynes, he postulated three reasons why individuals hold money, they are;

• SPECULATIVE MOTIVE:

This motive deals mainly with business. An individual that holds money for speculative reasons hold such money for business purposes.
And this demand is said to be elastic

• PRECAUTIONARY MOTIVES:
  This is a demand for money inorder to settle unexpected expenses and to cover up unforeseen occurrence.

For example, unexpected visitors, sickness, accident etc.
Individuals tend to save money due to the uncertainties of life, as there is a saying that goes "save money today and money will save you tomorrow".

• TRANSACTIONARY MOTIVE:

Day to day transaction is another reason why many individuals happen to hold money.

For example, the breadwinner of a family needs to hold money inorder to cater for the well-being of the family and sort some bills.

The above are explained reasons why individuals hold money, please follow along as we discuss on the supply of money.

SUPPLY OF MONEY

Supply of money can be explained to be the total amount of money that is available to be used at a given period of time in the economy.
This has to do with currency taking the form if bank notes leaving the bank system.

FACTORS AFFECTING THE SUPPLY OF MONEY

There are numerous factors affecting the supply of money in an economy and some of them are:

• BANK RATE:

Bank rate is known as the rate at commercial banks are being charged by central banks for lending money to them and from them.

If the bank rate is increased, banks will be discouraged from borrowing funds, and the discount of their bills will be affected, thus having an impact on the supply of money.

• CASH RESERVE:

Cash reserve which is sometimes called cash ratio is referred to the percentage expected to be kept by the commercial banks.

And when the cash reserve is low, the supply of money tend to be high and when the cash reserve is high, there's high supply of money.

• ECONOMIC SITUATION:

Economic situation also has effects on the supply of money in an economy, for example, the supply of money is usually reduced during inflation period

• When excess reserves is being demanded by the commercial banks, it also leads to an increased supply of money

VALUE OF MONEY

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The value of money can be explained to the amount it items a money can be exchanged for, that is, it refers to the quantity of commodity that can be purchased with money.

In other words, value of money can be explained as the purchasing power of money.

When fewer goods can be bought by a certain amount of money, then it can be said that the value of money has fallen, and this can only take place when there is rise in the price of the goods.

And when a larger amount of goods can be bought with a certain amount of money, it can be said that there's an increase in the value of money.

DETERMINANT OF THE VALUE OF MONEY

There are different factors that determines the price of money and some of them are :

• PRICE LEVEL:

The price level of goods and services is one of the Important factors affecting the price of money.

If the price of goods escalates, then the value of money will decrease, as it will be able to purchase fewer goods, but if the price of goods reduces, the value of money increases simultaneously.

• THE SUPPLY OF MONEY AND ITS VELOCITY IN CIRCULATION:

Whenever there is an increase in the circulation of money without a correspondence increase in the quantity of goods in circulation, it will be noticed that there will be scarcity of goods and a particular amount of money will buy fewer goods, which implies that the value of money has reduced

But when the otherwise happens, there will be an increase in the value of money.

This explains how the concept of our power ups helps increase the price of steem, but we shall not be learning that today.

• INFLATION AND DEFLATION:

As it known, inflation and deflation has effect on the value of money.

Inflation can be explained as an economic situation where there is too much money on circulation, and during inflation period the value of money reduces, and thus increases during deflation.

MEASUREMENTS OF THE VALUE OF MONEY

The value of money is usually measured by what we know as price index.

A price index can be explained as a weighted average of price which is displayed as a percentage of price that have existed in base year.

Mathematically, price index = price in current year/price in previous year ×100.

Let's take a short example.

1.) Assuming the price of steem was $10 in 2021 and it rose to $20 in 2022.
Calculate it's index number.

SOLUTION

Index number = (price of steem in 2021 ÷ price of steem in 2022) × 100%

= 10/20 × 100
= 50

As seen above, the price index is 50.
The price index usually helps to weigh the increase in the cost of living between a chosen period of time.

THE QUANTITY THEORY OF MONEY

The quantity theory of money can be explained as the relationship between the price level and the amount of money in circulation.

This theory helps to explain what occurs when there is an imbalance between the supply and demand of money.

The quantity theory of money helps to explain that more money is held by individuals than required, (that is, an excess supply of money), surplus will be spent on already produced goods, thus leading to an increase in price level.

The quantity theory of money states that more services can be brought about by an increase in the quantity of money in circulation.

The quantity theory of money was modified by Professor Irving Fisher to what we know as velocity of circulation of money.

And according to Professor Fisher, velocity of circulation of money refers to the rate at which money is spread within the economy from one person to another.

Mathematically, the theory quantity of money can be expressed as an equation known as the quantity equation of exchange, and it is shown below.
MV=PT

Where:
M= supply of money
P= price level
V= velocity of the circulation of money
T= quantity of goods.

CONCLUSION

As we have seen above, money is more than what we spend or hold to solve problems.
We have considered why individuals hold money, and we have explained in details the value of money, with it's mathematical representation.

I hope we all have learnt one or two new lessons from the demand and supply of money.

I remain my humble self @jueco