Macroeconomics

‭Factors that Shift the Money Demand Curve‬

‭Conversely,‬‭some‬‭factors‬‭other‬‭than‬‭the‬‭nominal‬‭interest‬‭rate‬‭cause‬‭the‬‭money‬‭demand‬‭curve‬‭to‬‭shift‬‭to‬ ‭the right (increase) or to the left (decrease).‬

‭These factors include:‬

‭●‬ ‭Changes‬ ‭in‬ ‭National‬ ‭Income:‬ ‭When‬ ‭real‬ ‭GDP‬ ‭(output)‬ ‭rises,‬ ‭the‬ ‭availability‬ ‭of‬ ‭goods‬ ‭and‬ ‭services‬ ‭for‬ ‭purchase‬ ‭increases,‬ ‭necessitating‬ ‭a‬ ‭higher‬ ‭demand‬ ‭for‬ ‭money‬ ‭to‬ ‭facilitate‬ ‭these‬ ‭transactions‬ ‭(Md‬ ‭shifts‬ ‭to‬ ‭the‬‭right).‬‭Conversely,‬‭a‬‭decrease‬‭in‬‭real‬‭GDP‬‭leads‬‭to‬‭a‬‭decrease‬‭in‬ ‭the demand for money (Md shifts to the left).‬ ‭●‬ ‭Changes‬‭in‬‭the‬‭Price‬‭Level:‬ ‭When‬‭the‬‭general‬‭price‬‭level‬‭increases‬‭(inflation),‬‭people‬‭will‬‭need‬ ‭more‬ ‭money‬ ‭to‬ ‭be‬ ‭able‬ ‭to‬ ‭buy‬ ‭goods‬ ‭and‬ ‭services.‬‭This‬‭increases‬‭the‬‭demand‬‭for‬‭money‬‭and‬ ‭shifts‬‭its‬‭curve‬‭to‬‭the‬‭right.‬‭The‬‭opposite‬‭is‬‭true‬‭in‬‭case‬‭of‬‭a‬‭decrease‬‭in‬‭the‬‭general‬‭price‬‭level‬ ‭(deflation).‬ ‭●‬ ‭Changes‬ ‭in‬ ‭Money‬ ‭Technology:‬ ‭When‬ ‭new‬ ‭technologies‬‭make‬‭it‬‭easier‬‭to‬‭convert‬‭wealth‬‭into‬ ‭money,‬ ‭people‬ ‭demand‬ ‭less‬ ‭money‬ ‭to‬ ‭keep‬ ‭at‬ ‭hand‬ ‭which‬ ‭shifts‬ ‭the‬ ‭Md‬ ‭curve‬ ‭to‬ ‭the‬ ‭left.‬ ‭Examples of such technologies include ATMs, credit cards, and online banking services.‬ ‭The Motives for Demanding Money‬ ‭Keynes‬‭uses‬‭the‬‭concept‬‭of‬ ‭liquidity‬‭preference‬ ‭to‬‭explain‬‭why‬‭people‬‭demand‬‭money.‬‭He‬‭explains‬‭that‬ ‭households and frms decide to hold part of their wealth in the form of money due to‬ ‭three motives‬ ‭:‬ ‭1.‬ ‭Transactions‬‭Motive:‬ ‭People‬‭need‬‭to‬‭hold‬‭money‬‭to‬‭make‬‭day-to-day‬‭purchases‬‭and‬‭payments‬ ‭(e.g., to buy goods and services).‬ ‭2.‬ ‭Precautionary‬‭Motive:‬ ‭People‬‭hold‬‭money‬‭to‬‭pay‬‭for‬‭unexpected‬‭and‬‭unforeseen‬‭events,‬‭such‬ ‭as illness.‬

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