Determinants of Supply And Demand For Money - SS2 Economics Lesson Note

The determinants of supply and demand for money are factors that influence how much money people want to hold (demand) and how much money is available in the economy (supply).

Determinants of demand for money.

The demand for money is influenced by several factors, which includes:

• Interest rates: As interest rates rise, people tend to hold less money because they can earn higher returns by investing in other assets. Conversely, when interest rates are low, people tend to hold more money.

Level of income: As income increases, people tend to hold more money because they have more to spend. Conversely, when income is low, people tend to hold less money.

Price level: As the general price level in the economy increases, people tend to hold more money because they need more to pay for goods and services. Conversely, when prices are low, people tend to hold less money.

 

Determinants of supply of money.

The supply of money is also influenced by several factors, which includes:

• Monetary policy: Central banks can control the supply of money through monetary policy, such as adjusting interest rates or printing more money.

Banking system: The banking system can influence the supply of money by creating loans and deposits, which increases the money supply.

Government spending: Government spending can increase the money supply by injecting money into the economy through public spending or transfer payments.