CAN AN INCREASE IN THE DEMAND FOR MONEY NEUTRALIZE THE EFFECT OF A CORRESPONDING INCREASE IN MONEY SUPPLY?
According to popular thinking, not every increase in the supply of money will have an effect on the production of goods. For instance, if an increase in the supply is matched by a corresponding increase in the demand for money then there will be no effect on the economy. The increase in the supply of money is neutralized so to speak by an increase in the demand for money or the willingness to hold a greater amount of money than before.
What do we mean by demand for money? In addition, how does this demand differ from the demand for goods and services?
Demand for money versus demand for good
The demand for a good is not essentially the demand for a particular good as such but the demand for the services that the good offers. For instance, an individuals’ demand for food is on account of the fact that food provides the necessary elements that sustain an individual’s life and wellbeing.
Demand here means that people want to consume the food in order to secure the necessary elements that sustain life and wellbeing.
Likewise, the demand for money arises on account of the services that money provides. However, instead of consuming money people demand money in order to exchange it for goods and services.
With the help of money, various goods become more marketable – they can secure more goods than in the barter economy. What enables this is the fact that money is the most marketable commodity.
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