Respond to the following in a minimum of 175 words:
- What are the uses of money?
- Compare and contrast the transaction demand and asset demand for money.
- What is the relationship between interest rate, aggregate income, and price level?
- Provide 2 specific examples of transaction demand for money.
- Provide 2 specific examples of asset demand for money.
1. Money functions as a store of value, which means it may be stored, recovered, or traded at a later time without losing any of its worth or purchasing power.
2. Money serves as a medium of exchange: It is simple to use money to pay for a variety of transactions.
3. It serves as an accounting unit, representing the true cost of products and services.
Compare and contrast the transaction demand and asset demand for money.
Transactional demand and asset demand are the two halves of the money demand. Money maintained for purchases is known as transactional demand (Dt), and it varies in direct relation to GDP.
Money maintained as a store of value for future use is known as asset demand (Da). Given that the interest rate represents the cost of keeping money idle, asset demand changes inversely with interest rates. The total amount of money required will be equal to the sum of the amounts asked for assets and transactions. The demand curve for money shows how the quantity of money demanded and the interest rate are inversely related.
You are holding the money as part of your transaction demand when you keep cash in your pocket or purse to pay for a movie ticket or keep money in your checking account so you may buy food later in the month.
The desire for highly liquid financial assets, such as local currency or foreign currency, that is not driven by actual activities like trade or consumer spending is known as the speculative or asset demand for money.
What is the relationship between interest rate, aggregate income, and price level?
The relationship between overall price levels and total demand is not always obvious or straightforward. In contrast, a rise in aggregate demand generally (and under ceteris paribus circumstances) results in an increase in the price level.
When the components of aggregate demand—consumption spending, investment expenditure, government spending, and spending on exports less imports—increase, so does aggregate demand.
In the broadest sense, a rise in aggregate demand corresponds with an increase in the price level; conversely, a reduction in aggregate demand corresponds with a lower price level (and assumes ceteris paribus circumstances).
It goes without saying that when a group of customers wants more products or services, the prices for those goods or services rise above average, but this does not entail those real prices (as opposed to nominal prices) must also rise.
On the other hand, a decline in overall demand is associated with a lower level of prices. When the aggregate demand’s constituents collapse, the demand as a whole decline.
Borrowing money gets more “expensive” as interest rates increase. When interest rates rise, consumer spending and capital investment decline since they would normally be funded by borrowed money. As a result, according to the equation, aggregate demand declines.
Provide 2 specific examples of transaction demand for money.
The money needed for household necessities like groceries, bread, milk, or food in general is one example from the real world. Second, think about the cost of getting your hair trimmed.
Provide 2 specific examples of asset demand for money.
Keeping cash as a form of investment, similar to stocks and bonds. Owning a variety of investments, including equities, bonds, jewelry, artwork, a house, a savings account at a credit union, and $5,000 stashed away in a safe box, among others.