Hi all I have a question on demand for nominal money I read that : when price level goes up, then demand for nom money goes up. I need more money to buy goods when inflation rate goes up, then nominal int rate goes up, demand for nom money goes down. I prefer not to hold money but for me price level and inflation are linked (if not the same) so how can they have opposite effect on demand for money little confused here… tks for your help
According to my notes, demand for nominal money is affected by 3 things: 1. Price Level 2. Interest Rates 3. Financial Innovation Inflation isn’t explicitly listed as one of the factors affecting demand. However, you can look at it like this. If inflation goes up that means REAL interest rates have gone down. If real interest rates are down, I’m more inclined to borrow because the opportunity cost of holding money is also down. In that sense demand for nominal money actually goes up when there’s inflation. That’s just my theory I haven’t really looked it over but that’s how I’ve always understood it.
tks for your explanation… according to my notes, one of the factors that impact money demand is NOMINAL interest rates and it says: the higher the nom int rate, the lower money demand. and it says too: the higher the inflation, the higher the nom int rate, the lower the money demand So inflation and price level has inverted effected on money demand?
I don’t have a definite answer for that, sorry. If you think about it intuitively though, if there is inflation you’re going to want to spend more which would in turn drive up the demand for nominal money. Edit: So you’re right about it being nominal interest rates that affect demand, but according to 11th hour it only affects quantity demanded. Not sure if that changes anything.
as i understand when inflation rate goes up, then nominal int rate goes up, demand for real (not nom) money goes down. and real demand goes down since you prefer to hold high-yielding assets rather than low yielding M1. in fact by the qty theory, inflation is concurrent with nominal money growth so inflation up should lead to more qty of nominal money.
bben Wrote: ------------------------------------------------------- > but for me price level and inflation are linked > (if not the same) so how can they have opposite > effect on demand for money > inflation and price level are NOT the same. inflation is a persistent increase in price level. the price level can increase, but not persistently increase. big difference. increase in price level will lead to more money demanded - things cost more. with high inflation the nominal rate increases, hence the cost of holding money increases so investors will demand less by investing excess cash to earn the higher rates. inflation is longer term, price level can jump up and then back down.
Tks guys for your explanations, it’s clear now