The Control Of Money Supply & Demand Of Money

1524 words - 7 pages

Arlene Ochoa
Professor Jim Davis
Econ 1 C1
June 20, 2013
The Control of Money Supply & Demand of Money

Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will ...view middle of the document...

The real rate of interest is then, nominal interest less the inflationary premium. Hence, as the purchasing power of money decreases, nominal interest rates decrease. While, increasing or high rates of inflation lead to increasing rates of nominal interest rates (Gwartney).
The money supply in the U.S. economy is controlled by the government, it has assigned the Federal Reserve to oversee the banking system and control it. Money supply is the quantity of money available or supplied in the economy. It can change the amounts of money supply in the Federal banking system through the purchases and sales of government bonds. In open-market, the Federal Reserve buys and sells government bonds, by adding money and taking money from central banks. When it buys bonds, it adds money back into the bank. When it sells its bonds, the dollars it receives are withdrawn from the bank. Changes in bank reserves (deposits and withdraws), can alter the banks’ ability to make loans and create money. This type of monetary control is important because it explains how changes in the money supply affect the demand for goods and services.
Money demand is different because it comes from people wanting more of it and wanting to hold it rather than holding other types of assets. With money, people can purchase goods and services and also earn interest if held. The concept behind liquidity is that one may convert assets into cash. Cash is capital that allows for resources to be purchased. Today, money is of utmost importance than it was hundreds of years ago and is the most liquid asset available. The liquidity of money explains the demand for it. People choose to hold money instead of other assets because it offers higher rates of return. The quantity of money demand is explained through interest rate. It is also the opportunity cost of holding money (Keynes). Gwartney states, “Because resources are scarce, the use of resources to produce one good diverts those resources from production of others…The highest valued alternative that is sacrifice is the opportunity cost of the chosen option” (page 7). In essence, there is greater value placed on interest rates because people expect to earn income on the dollar. However, an increase in the interest rate raises the cost of holding money and reduces the quantity of money demanded. A decrease in interest rate, reduces the cost of holding money and raises the quantity demanded.
There are some advantages investors and lenders have from availability of early loanable funds. For investors, loans allow them to finance their capital assets because they expect to be able to increase output and have a greater return in profits. Gwartney states, “Investors can gain from borrowing funds…only when the capital assets they purchase permit them to expand out (or reduce costs) by enough to make interest payments and still have more output than they would have without the investment” (page 267). For consumers, having...

Other Essays Like The Control of Money Supply & Demand of Money

Time Value of Money Essay

3194 words - 13 pages TIME VALUE OF MONEY Future Values and Compound Interest Interest is the price paid for the use of borrowed money You have $100 invested in a bank account. Suppose banks are currently paying an interest rate of 6 percent per year on deposits. So after a year, your account will earn interest of $6: Interest = interest rate × initial investment = .06 × $100 = $6 You start the year with $100 and you earn interest of $6, so the value of your

Time Value of Money Essay

1335 words - 6 pages TIME VALUE of MONEY Exercises Author: Luigi V. TAVA Copyright SDA Bocconi revised 2004.10 EMQ 901 1 1) For a loan of 9.2 estimate the future refund value (principal, interest, total) with simple interest: a) yearly rate 5%, for 6 years and 4 months b) yearly rate 8%, for 7 years, 2 months and 15 days 2) With a starting investment of 3.65 how long does it take to have a final total value of 4.779 with a 5.2% yearly rate, simple

Time Value of Money

661 words - 3 pages that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity? Answer Selected Answer: e. $6,744.83 Correct Answer: e. $6,744.83 • Question 3 0.5 out of 0.5 points Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that

Time Value of Money - 700 words

700 words - 3 pages 1. "List and describe the purpose of each part of a time line with an initial cash inflow and a future cash outflow. Which cash flows should be negative and which positive" (Cornett, Adair, and Nofsinger, 2014, p. 91)? Time lines “shows the magnitude of cash flows at different points in time, such as monthly, quarterly, semiannually, or yearly” (Cornett, M. M., Adair, T. A., & Nofsinger J. (2014). Inflow cash is known as positive. Outflow

The Demand and Supply of Oil

1282 words - 6 pages does control the oil market. It only has a share of 40% of crude oil in the world market. This means that even if opec wanted to maintain a high price, the other producers of oil may not have let them do that. Q4. Study the nature of elasticity in the demand and supply of oil. Elasticity can be defined as the change in demand in accordance to the change in price. Taking the case of oil, it has different elasticity’s in the long run and the

Role of Demand and Supply

1705 words - 7 pages ELEMENTS OF DEMASND AND SUPPLY Elements of Demand and SupplyEvery economy must somehow the three basic economic problems: what should be produced, how goods and services should be produced, and for whom are the goods and services produced. Hence, every economy must make decisions, and mostly it relies on the market system and price. The operation of demand and supply is the answer to the three basic is the answer to the three basic economic

Demand And Supply Of Oil

909 words - 4 pages IntroductionOil is one of the most valuable and scarce energy resources in the earth, and in order to assess the recent developments in the price of Oil in world trade, it is important to analyze the underlying forces of demand and supply. As energy is an important vehicle of production and growth, Oil is still its main source and has no competing substitute to replace it altogether in the foreseeable future. The UAE is one of the biggest

The Impact Of Changes In Supply, Demand, And Pricing

813 words - 4 pages and demand can help is to understand money supply and make wise business choice that can have a positive effect in trying or inflationary times.References:Colander D.C. (2004). Economics. New York: The McGraw-Hill Companies. Retrievedfrom University of Phoenix Online Library on July 25, 2005.Gas Prices May Stay At Peak Longer Than Thought, (Retrieved July 25,2005)http://www.msnbc.msn.com

Microeconomics and the Laws of Supply and Demand

830 words - 4 pages Microeconomics and the Laws of Supply and Demand Your NAME ECO/365 July 6, 2015 INSTRUCTOR NAME Microeconomics and the Laws of Supply and Demand The simulation showed how a shift in the supply curve or the demand curve can lead to significant changes to the economic standing of the business. When the demand curve shifts downward or to the left it showed a decrease in demand from renters thus yielding less apartments rented. This

Demand and Supply of America Medicine Market

896 words - 4 pages Demand and Supply of America Medicine Market Associated with the quality life that modern society people pursued, an excellent health care is always concerned no matter where people are. However, the medicine demand and supply are an indispensible part of the chain. So there is a medicine issue of demand and supply in America, which eventually has required US government intervention is of serious concern. Initially, from the article, it is

Control of the Supply Chain Networks by Supermarket Chains

3178 words - 13 pages ; Tesco would create demand and therefore justify the need for supermarket stores as required by the planning regulation. Furthermore, Tesco could create barriers to entry against competition and therefore further entrench its control of the supply chains. The retailer would have more personal data than the government giving it formidable power to eclipse that of the government (Hough 2010). For the customer, life would revolve around the retailer

Related Papers

Demand For Money Essay

881 words - 4 pages Quantity theory of money (QTM) – suggests that the demand for real money balances is  proportional to income. Quantity eqn.: MxV=PxT where M – money supply; V – velocity of money: the # of times a PhP bill changes hands for time, t; P – price level; and, T – transactions. 1 13/10/2015  Income (Y) version of the QE: MxV=PxY ◦ where V: the # of times a PhP bill enters someone’s income; ◦ P x Y: nominal GDP. This

The Ascent Of Money Essay

749 words - 3 pages The Ascent of Money In the part two, the author talked about how finance became the realm of the masters of the universe. It was through the rise of the bond market in Renaissance Italy. With the advent of bonds, war finance was transformed and spread to north-west Europe and across the Atlantic. It was the bond market that made the Rothschilds the richest and most powerful family of the 19th century. In the book, he rightly points out that

Giant Pool Of Money Essay

1047 words - 5 pages the credit rating agencies without scrutiny. On the other end, Clarence Nathan knew that he could not afford the loan (“I wouldn't have loaned me the money. Nobody that I know would have loaned me the money.”), but rejected the fact and took the loan anyway because he needed the money. (Blumberg & Davidson, 2008) Anchoring Here, the credit rating agencies made estimates for the worst-case scenario of the foreclosure rate to be 8-12

Microeconomics And The Laws Of Supply Demand

588 words - 3 pages the other hand, can cause supply and demand curves to shift and cause a significant impact on the equilibrium price and on the quantity of apartments the company has available. An example was when the government put a price ceiling. This controlled the price of the rent, preventing GoodLife from getting as much money as they could get for their apartments if there was a good demand for their apartments. This scenario also makes it hard to see the