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Keynes three psychological factors affecting the money demand have been accepted by all for many years. Under the current economic situation, I have some new understanding about several points of his theory and about Fishers quantity theory of money. First, Id like to state some assumptions about my analysis. While we talk about money demand, we always emphasize the desire to obtain the money and the ability to get it, that is, we tend to define the nature of money demand, however, the range of money demand has not been mentioned, that range plays a great part in the analysis and understanding of money demand. We all know that the demand and supply of money are closely connected, and the money supply has its definition and range, so I choose money supply as the base of my analysis of demand. However, it doesnt mean that money supply decide the quantity of demand.
Different countries and financial systems have varied definition of the range of money supply. When some countries choose M 1 (the amount of money in circulation in notes, coin, current accounts, and deposit accounts transferable by cheque), some choose M 2 (M 1 plus savings account and fixed deposit), and others choose M 3, even M 4 (M 2 plus holdings of money-market instruments of financial or non-financial organizations, such as bonds and stocks) as their supply of money. Considering the different definitions of money supply, together with the theories of Keynes and Fisher, I want to analyze some points in detail. In the analysis of economics, the output is equal to the income (including salary, interest and rent). According to Fishers theory? MV = PT, the right side of the equation: PT can be considered the output under the current price.
In fact, the output is also the income, and income is definitely connected with peoples demand of money. There is logic in it. Peoples income has several uses, and generally they can be classified into two parts: 1. spend the money (used for investment or needs of daily life) and the money exists in the market as currency or check; 2.
save it and the money exists as demand deposits, saving or fixed deposits. What Fisher means is that the money demand can totally reflect peoples income or peoples wealth. However, When the money supply is defined as M 1, that is, the currency and the demand deposit, the money demand is accordingly defined within this limit, and in this case, VM can only partly reflect the output, because it only constitutes part of the use of the income. Only when the money supply is defined in a broader range (M 2 or even broader), can the correspondent demand of money reflect totally the income, the wealth, and can the equation be qualified. Keynes three psychological factors affecting money demand apply to every range of money demand correspondent with the different ranges of money supply. However, the relationship between the interest rate (r) and peoples venture demand should be considered when the definition of money supply changes.
It is widely accepted that when r is low, the opportunity cost of holding money is relatively small, and people dont spend much money to buy bonds or stock, and the demand for money is great. And when r is high, the opportunity cost of obtaining money is high, and the demand for money is small. So the demand and r has a inverse proportional relationship. We tend to neglect that what we talk about here aims at the relative small range of money demand: M 1 and M 2. When the money supply is defined as M 3 or even M 4, when the bonds and stock (money- market instruments) also constitute the money supply and correspondent money demand, the relationship is direct proportional.
When r is low, the amount spent on stock or bonds is small, but stocks or bonds are also part of money demand, so the money demand is still small, thus, in this case, r and money demand has a direct proportional relationship, and vice versa. So, when the range of supply is defined in a different way, the relationship between r and demand can be reversed. As is analyzed above, the theory of Fisher and several points of Keynes theory can be complemented and understood differently in light of the definition of the range of money supply and the close tie between supply and demand.
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Research essay sample on The New Understanding Of Keynes And Fishers Theory
