The Money Supply and Demand and the Interest Rates

Document Type:Essay

Subject Area:Microeconomics

Document 1

Due to the above factor, the money supply and the credit lending has been greatly affected due to the consistent advances in the intermediation capacity of the banks. This has resulted to the long term price developments in the goods market sand the assets and by the perception of the banks in terms of the soundness of the banks in terms of the financial capabilities in the short term. Thus in order to develop the signals for the risks associated with the stability of the price, the understanding of the developments in the behaviors of the banks remains such an important element It is important to note and understand why the advancement in the intermediation process of the banks might have contributed to the continuous development and growth in the growth of both credit and money which has consequently affected the macroeconomic advancement relevant for the monetary policy. Banks operating within the euro area have undergone some important changes over the past years. Money can be described as the assets which are widely used and are commonly accepted as the means of payment. Thus, different classes of assets can be classified as money. Checking the accounts and currencies are said to form a very important definition of money but exclusion from the definition are the large interest bearing bank deposits whose trading take place in the market for the foreign exchange. Additionally, money is said to be very liquid and thus can be quickly and easily used to compensate for the services and goods obtained.

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All in all money has a very little rate of return (Fabrizio Perri Home Page)  Money supply Money supply is controlled by the central banks especially in US, the Federal Reserve System is the central. The reserve regulates directly the amount of the currency which should be in circulation which also includes the banking system reserves. This is as demonstrated below, In the diagram below, the downward sloping schedule for the money demand indicates that at a given level of real income, Y, the real money demand will rise with the decrease in the interest rate. Thus, an increase in the demand for the real money has a significant direct impact on the interest rate. That is, when people demand more of the real money probably due to some related factors such as decreased supply of money, the interest rate will be increased and this may discourage more borrowing (Ghosh 06) The aggregate demand for real money and the rate of interest.

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The above graph indicates the impacts of changing aggregate demand for the real money on the effects of the interest rates (Econometrics Laboratory, UC Berkeley) A rise in the level of real income by the individuals may as well have an effect on aggregate demand for the real money. This can be indicated by below schedule: Thus when a real income shifts from the Y1 the level Y2 results to an increase in the demand for the real money balance at any interest rate level. The government will buy the securities and bonds to reduce the money in circulation and thus reducing the amount of money circulating in the economy. Capping of the interest rate will ensure that the lending institutions do not overcharge the borrowers such that they are discouraged to borrow money for their investment.

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Placing the interest rate ceiling ensures that the lending rate is uniform and thus all lending institutions carries out businesses almost of the same class and type. This ensures that the money demand remains the same regardless of the prevailing economic situation in the country. Buying securities by the government as a way of regulating interest rates ensures that there is enough money in the economy which is in circulation and thus the demand for money in the economy remains at equilibrium. Works cited "Demand, Supply, and Equilibrium in the Money Market.  2012 Book Archive, 2012books. lardbucket. org/books/macroeconomics-principles-v2. s13-02-demand-supply-and-equilibrium-. S. Money, Interest Rate, Price Level and Real GDP. vol.  2, no.  22, 2005, pp. com/wps/media/objects/2095/2146070/Ch04App03. pdf. www3. uakron. edu/econ/ghosh/201-004/chapter_11_for_web.

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