Aggregate Money Demand
Aggregate money demand refers to the total amount of money that individuals and businesses in an economy want to hold for transactions and speculative purposes. It is influenced by factors such as income levels, interest rates, and price levels. Understanding aggregate money demand is important for policymakers in managing monetary policy and ensuring price stability.
5 Key excerpts on "Aggregate Money Demand"
eBook - ePubContemporary Economics
An Applications Approach
- Robert Carbaugh(Author)
- 2016(Publication Date)
- Routledge(Publisher)
...Recall that the total amount of final goods and services can be divided into the amounts spent for consumption, investment, government purchases, and net exports. The aggregate quantity demanded is the quantity of final output that buyers will purchase at a given price level. As seen in Figure 12.1, the aggregate demand curve may look like a market demand curve, but it’s really different. Instead of showing the relationship between the price and quantity demanded of a single good—say, motorcycles—the aggregate demand curve describes the relationship between the price level and the aggregate quantity of all final goods and services demanded in the economy. Movements along the Aggregate Demand Curve Referring to Figure 12.1, notice that the aggregate demand curve is downward-sloping. As the price level falls, all else being equal, the total amount of final goods and services purchased rises. What explains this relationship? The price level is a determinant of the amount of money demanded. As the price level declines, households need to hold less money to purchase the goods and services they desire. Households thus try to decrease their holdings of money by lending it out as the price levels fall. For example, a household might place its excess money in an interest-bearing savings account at a bank. The increased supply of savings drives interest rates downward, thereby encouraging borrowing by households that wish to invest in new housing or by businesses that want to invest in new plant and equipment. Put simply, a lower price level decreases interest rates, which results in additional spending on investment goods and thus increases the aggregate quantity of goods and services demanded. 3 3 This explanation of the downward-sloping aggregate demand curve is known as the interest rate effect...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...CHAPTER 3 Aggregate Demand, Output, and Equilibrium 1. Aggregate Demand and Supply In Chapter 1, the equilibrium of the economy was roughly described in terms of aggregate demand and supply. It was said that when the amount of money everyone wishes to spend is equal to the value of the goods and services currently being made available for purchase, the economy is in equilibrium in the sense that the situation will not itself cause changes in the general level of prices, in the level of output, or in anything else. But the concept of equilibrium implies the possibility of disequilibrium: aggregate demand may be equal to aggregate supply, but it may also be larger or smaller at any particular time. In this, there is a marked contrast with the relationship between National Expenditure and National Product, since these are identical in amount at all times and under all circumstances; they can never be said to be in equilibrium, because they can never differ. Nonetheless, the concepts defined in the previous chapter can be used to throw light on the conditions of equilibrium between aggregate demand and supply. For the time being, the notion of aggregate supply will be likened to that of National Product. This does not mean that the two are to be regarded as identical; National Product is simply a numerical measure of the flow of output, whereas the concept of supply involves the idea of volition – it is the quantity that sellers wish to sell, rather than the amount that they merely happen to have available from current production...
eBook - ePubEconomic Principles and Problems
A Pluralist Introduction
- Geoffrey Schneider(Author)
- 2021(Publication Date)
- Routledge(Publisher)
...Sometimes, it is possible to intuit macroeconomic behavior from microeconomic models. For example, we know that when individual consumers have more money, they tend to spend more, and that holds at the macroeconomic level as well. Increases in national income will lead to increases in national consumption levels. However, there are also macroeconomic foundations for microeconomic behavior. The general macroeconomic environment, including the availability of employment, the rate of economic growth, and the value of the stock market, drives individual consumer behavior. In this sense, there are macroeconomic foundations for much microeconomic behavior. Thus, macroeconomists must carefully observe what factors affect the macroeconomy writ large, to determine when microeconomic behavior results in macroeconomic outcomes and vice versa. Chapter 27 focuses on the aggregate demand and aggregate supply (AD-AS) model, which is the cornerstone of modern New Keynesian analysis. Unlike the demand curve model of microeconomics, which focuses on individual consumers, the macroeconomic aggregate demand curve incorporates purchases by consumers, purchases of capital goods (investment) by firms, government purchases, and net purchases of goods and services from the international sector. Aggregate demand is the demand curve for all sectors of the macroeconomy. Similarly, aggregate supply is the supply curve for the whole economy, reflecting the behavior of all suppliers in all industries. Due to the complexity of the macroeconomy, there is often disagreement about the structure of macroeconomic models. Political economists dispute certain aspects of the AD-AS model, as we will see in this chapter. Chapter 28 lays out the Keynesian aggregate expenditure–income model, sometimes called the “Keynesian cross,” with a number of examples and applications. For most of the 20th century, this model was considered the cornerstone of macroeconomics...
eBook - ePub- Ola Olsson(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...Part III Macroeconomic Policy 11 IS—MP, Aggregate Demand, and Aggregate Supply DOI: 10.4324/9780203139936-14 In this third part of the book, we will now shift our focus in order to analyze the effects of macroeconomic policy. Most of this chapter will be based on the IS—MP model of the goods and money markets. This model is not micro-founded since it is not based on optimizing household behavior. Instead, it follows in the Keynesian tradition of assuming certain behaviors of variables at the macro level. Only the specifications of aggregate supply will rely on micro foundations. The analysis in this chapter is therefore quite different from the analysis in most other chapters. We start off with the traditional Keynesian framework where we discuss aggregate expenditure and multipliers. We then derive the aggregate demand function from equilibria in the goods and money markets. We also elaborate on the properties of the aggregate supply function under varying assumptions of price and wage stability and provide an overview of the Lucas critique of traditional Keynesian economic policy. After that, we present a new model that introduces financial intermediation into the standard IS—MP framework. Finally, we also present some of the main ideas in the so-called new Keynesian paradigm. 11.1 Aggregate Expenditure and the Multiplier The traditional Keynesian model focuses to a great extent on aggregate demand. The typical starting point is an equation describing the user side of the economy. Let total output be Y, then total expenditure in a closed economy model (we assume away exports X and imports M) is E t = C t + I t + G t. In equilibrium, we should have that total expenditure equals total output so that E t = Y t...
eBook - ePub- Robert E. Lucas Jr., Max Gillman, Max Gillman(Authors)
- 2013(Publication Date)
- Harvard University Press(Publisher)
...11 Money Demand in the United States: A Quantitative Review I. Introduction Allan Meltzer’s research career has been so productive and so varied that it would be an act of folly, not friendship, to attempt to review it in a single paper. Yet I do want to talk about his research on this occasion, for research is what Allan’s career is mainly about, and I want to do so in detail, because details are the way scholarship is carried out. Accordingly, I will focus my attention mainly on a single paper, one that has influenced my own thinking on monetary economics a great deal, Meltzer’s “The Demand for Money: The Evidence from Time Series,” published in the Journal of Political Economy in 1963. Meltzer’s “Demand for Money” was one in a series of his empirical studies in monetary economics, much of which involved joint research with Karl Brunner. It followed earlier work by Latane and others, especially Friedman, and helped to stimulate closely related later contributions by Laidler and others. 1 The shared objective of this research program was, in Friedman’s (1956) terms, to demonstrate that the demand for money is a “highly stable function” of a limited number of variables, to discover the most useful, operational measures of money and these other variables, and (again citing Friedman) to work “toward isolating the numerical ‘constants’ of monetary behavior.” Meltzer’s paper was the first to estimate an income (or wealth) elasticity and an interest elasticity simultaneously from time series data from a single country (the U.S.). The objective of the present paper will be to review and replicate these results, to reconsider how they might be interpreted theoretically, and to see how well they stand up to the 25 years of new data that have become available since Meltzer wrote. An estimated money demand function provides answers to two important questions of economic policy...
