Economics - Money Demand Concepts

The equation that shows the relationship between the money supply (M), velocity of money (V), price level (P), and real output (Y). It states that the product of money supply and velocity equals the product of the price level and real output.

The idea that changes in the money supply lead to proportional changes in the price level. If the money supply doubles, the price level also doubles, assuming other factors remain constant.

The percentage change in the price level over a period of time. It measures the rate of inflation.

The equation that shows the relationship between the inflation rate, the growth rate of the money supply, and the growth rate of real output. It states that the inflation rate equals the growth rate of the money supply minus the growth rate of real output, assuming velocity is constant.

The rate at which the money supply is increasing. It's usually measured as a percentage change over a year.

The rate at which the economy's output of goods and services is expanding. It's usually measured as a percentage change in real GDP over a year.

A key assumption in the quantity theory of money and inflation, stating that the average number of times a dollar is spent on goods and services in a given period remains constant.

The relationship between the money supply and the price level. If the money supply doubles, the price level doubles, holding other factors constant.

The desire to hold money for everyday transactions, like buying groceries or paying bills.

The motive to hold money as a buffer against unexpected expenses or opportunities.

The desire to hold money as a store of wealth, anticipating potential future price increases.

The amount of times, on average, that a unit of currency is used for transactions within a specific time period.

The relationship between the demand for money and the level of income in the economy.

The impact of technological advancements on how people pay for goods and services, which can influence the demand for money.

The cost of holding money instead of investing it, represented by the interest that could be earned from investment.

The relationship between interest rates and the demand for money, primarily influenced by the precautionary motive.

The amount of money people choose to hold as a portion of their assets. It depends on factors like income, interest rates, and preferences.

Keynes's theory suggests that the demand for money increases with income because people need more money to spend and decreases with interest rates due to the opportunity cost of holding money.

As interest rates rise, the relative return on holding money compared to other assets (like bonds) decreases, leading to a lower demand for money.

The desire to hold money falls when wealth increases because people can allocate more funds to other assets.

The demand for money is influenced by how easy it is to make payments without cash. For example, widespread use of digital payment systems can reduce demand for physical money.

Higher inflation means money loses value faster. This reduces the demand for money as people seek to hold assets that don't depreciate in value.

If other assets (like bonds) are easily converted to cash, the demand for money is lower. People readily move money into these assets when needed.

The demand for money is affected by how risky other assets are. If other assets are perceived as riskier, people may hold more money for safety.

The value of a future payment today, considering the time value of money.

It's a method to calculate the present value of a series of future cash flows, assuming a constant interest rate.

A dollar earned today is worth more than a dollar earned in the future, due to the potential for earning interest.

The interest rate that makes the present value of all future cash flows of a debt instrument equal to its current market price.

A series of payments that a debt instrument holder receives over its lifetime.

The process for calculating the present value of a series of uneven cash flows by discounting each individual cash flow back to the present.

The present value of future cash flows discounted at the appropriate discount rate.

The interest rate that makes the present value of the future cash flows of a debt instrument equal to its market price.

A loan where the borrower repays the principal and interest in equal installments over a set period.

A bond that pays regular interest payments (coupons) until maturity, when the principal is repaid.

A bond that is bought at a discount to its face value and pays no interest. The face value is repaid at maturity.

A loan where the borrower repays the principal and interest in a single payment at maturity.

The present value of a future cash flow, discounted back to the present using the interest rate.

The rate of return on an investment, expressed as a percentage.

The number of years until a financial instrument matures.

The total amount of money to be repaid at maturity.

The interest rate that does not take inflation into account. It reflects the raw percentage increase in the amount borrowed. For example, if you borrow $100 at 8% nominal interest, you owe $108 back.

The real interest rate is adjusted for inflation, reflecting the true increase in purchasing power for the lender. It considers the erosion of purchasing power due to inflation. For example, if you borrowed $100 at 8% nominal interest but inflation was 5%, the real interest rate is only 3%, as the lender truly gained 3% in purchasing power after inflation.

The equation that relates nominal interest rate (i), real interest rate (ir), and expected inflation rate (πe). It shows how the nominal interest rate compensates for inflation.

The total resources owned by an individual, including assets like cash, investments, and property.

A higher level of investor wealth generally leads to a higher demand for assets, including bonds and stocks. With more resources, individuals are more likely to invest.

The higher the real interest rate, the less incentive people have to borrow money, as the cost of borrowing is higher. Conversely, lenders find lending more attractive.

Treasury bills are short-term debt securities issued by the government, considered very safe investments. They are used as a benchmark for other interest rates in the market.

Government securities are debt instruments issued by the government to finance its spending. They can be short-term (like T-bills) or long-term (like bonds), offering different maturities and yields.