What is the Theory of Money Demand? What is money supply and money demand

The basic idea of the Baumole-Tobin model The basic idea of the Baumer-Tobin model is that a person faces a dilemma in maintaining the money stock: that is, if the individual wants to maintain a larger money stock, then he will face the loss of interest income if he converts this part of the money into interest-bearing assets; If he keeps less money, then he will have to endure the transaction costs of frequently converting interest-bearing assets into money in order to meet his daily monetary needs.

Thus, the question of how much money stock to maintain translates into the question of how to minimize the sum of the costs of loss of interest income and transaction costs.

Mathematical Expressions for the Baumore-Tobin Model Always md is the amount of cash that is willing to hold, T0 is the individual's income at the beginning of each period, B is the transaction cost of the bond, and i is the interest rate of the bond. This model is also known as the square root rule. For the demand for money, its significance is as follows:

1) The increase in income t0 and the increase in the demand for money; 2) The increase in transaction costs B will reduce the demand for bonds and increase the demand for money; 3) The increase in bond interest rate i will be an increase in bond demand; 4) The change of ** makes B and T0 change at the same time, and the result is that MD changes in the same proportion.

Policy implications of Baumore's inventory model.

1).The model argues that the most basic demand for money, the demand for transactional money, is also affected by interest rates.

2).According to the square root formula, assuming that interest rates and prices remain constant, the proportion of income increase must be greater than the increase in the money supply in order for the public to absorb the new money.

3).The model can also be used in the field of international finance, such as the management of international reserves. <>

Synopsis of Friedman's theory of money demand: 1. Money demand is related to total income (permanent income) or average income, and has nothing to do with short-term income; 2. The demand for money is related to the yield premium of interest-bearing assets, and the difference in the rate of return on assets is also stable in a certain period of time; 3. Monetary demand is related to personal preferences, and preferences are related to people's living habits, which are also stable in the short term. In this way, the conclusion of the theory is that the demand for money is stable for a period of time, and the monetary imbalance is caused by the money supply, so it advocates the implementation of a stable and economic growth "single currency rule", which is different from the "camera choice" policy theory represented by Keynes.

However, with the continuous innovation of financial instruments and the change of people's living habits, the demand for money has become very unstable, and these factors are not considered by the theory. The volatility of currency demand will gradually increase with the innovation of financial instruments. <>

In terms of deposits, the amount of money has increased, liquidity has increased, more money has been used for savings, and the cost pressure on banks to borrow money from depositors has decreased, so interest rates have fallen, on the contrary, the amount of money has decreased, and the money used for savings has decreased accordingly, and the pressure on the cost of bank borrowing money has increased, which will increase interest rates.

On the contrary, if the amount of money is less, the cost of bank deposits increases, and the interest rate will be increased accordingly.

2.According to Keynes's theory, speculative demand is mainly related to the interest rate in the money market, and the lower the interest rate, the more speculative money demand, therefore, speculative money demand is a decreasing function of interest rates, in layman's terms, the higher the interest rate, the more reluctant people who need money to borrow because of the increase in costs, and the decrease in money demand, that is, negative correlation.

There are three motivations for people's demand for money. One is the demand for currency transactions. Trading demand refers to the demand for currencies that arises to cope with daily transactions.

It is rooted in the asynchronous nature of income and expenditure. The second is preventive demand, which refers to the demand for money in order to prevent unexpected spending. It is rooted in the uncertainty of future income and expenses.

Since the trading demand and the prevention demand of money are both functions of income, they are often referred to as trading demand. The third is the speculative demand for money, which refers to the demand for money in order to buy profitable bonds. It is rooted in the uncertainty of future interest rates and is a subtraction function of interest rates.

Answer]: B, C

This question examines the theory of money demand. The theory of money demand includes Keynes's theory of the demand for money (liquidity preference theory) and Friedman's theory of the quantity of modern money.