SS2 Third Term Economics Lesson Note – Money Demand For and Supply of Money

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WEEK 5

TOPIC – MONEY DEMAND FOR AND SUPPLY OF MONEY

CONTENT: –

• Determinants of supply and demand for money
• Value of money and the price level

SUB-TOPIC: – THE SUPPLY OF MONEY

The supply of money implies that entire stock of money in an economy and it consists of the bank notes, coins and bank deposits. It is important to note that the above definition of money supply is like that because of the existence of other assets that can be converted to cash. These are called “near monies” since they can convert into currency as well even though at a cost.

DEMAND FOR MONEY

The demand for money means the desire to hold money in liquid or cash form as against spending the money. It is also the desire for money to serve as a medium of exchange and simultaneously serve as a store of value.

Reasons and motives why people demand for money

• The transaction motive: – It is the desire to hold money for the everyday transactions that take place such as paying transport fares and purchasing food items.
• The precautionary motive: – money is held in order to meet thee needs arising from unplanned or unforeseen circumstances such as sickness or accidents. It is often referred to as holding money for the “rainy day”.
• The speculative motive: – This is the desire to hold money in order to meet future expectations such as for investment purpose and expected fall in the prices of commodities.

EVALUATION

• Define supply of money and demand for money?
• State three reasons or motives why people demand for money

Sub-Topic 2:  THE VALUE OF MONEY AND THE PRICE LEVEL

 The value of money refers to the quantity of goods or services that a sum of money can buy at a point in time. The value of money is not state static as it changes from time to time with price as its indicator.

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