MONEY DEMAND CURVE

Money Demand Curve

Money Demand Curve

Answer 1

Monetary principle is the control that a country's centered bank or government exercises over the cash provide and credit or, on the other hand, over a short-term interest rate. Along with fiscal policy, it is the most important policy for achieving macroeconomic stability. Stability is usually taken to mean low and stable inflation, real interest rates compatible with reasonable levels of saving and investment, sufficient financing of economic activity, and a stable and competitive exchange rate.

Ultimate responsibility for deciding monetary policy objectives and strategy used to belong to government, although nowadays there is a broad consensus that it is better assigned to a central bank that is independent of the executive (the central banks mentioned above, and many others, are independent).

Answer 2

What the monetary authority actually does, therefore, is modify the composition of banks' portfolios by changing a very short-term interest rate (such as the federal funds rate in the United States, or the refinancing rate in the euro zone). Banks react to that increase (reduction) of liquidity by extending more (less) credit to their customers, while lowering (rising) the interest rate on those loans. In doing so, they change the saving, consumption, investment, and borrowing decisions of households and companies: A drop in interest rates will encourage them to spend and borrow more, while the opposite will occur if interest rates increase. Ultimately, monetary policy will end up affecting the level of demand, production, and employment, as well as the price level. Eventually, through the inflows and outflows of capital, monetary policy also affects exchange rates and the country's balance of payments.

Answer 3

It has been said that “money affairs” and the case for this declaration can be made in at least two distinct contexts. In one, monetary principle is contrasted with fiscal principle ...