Do people always want as much money as possible? YES. However, when we talk about demand we know that there are sacrifices that have to be given up, specifically every individual faces a constraint. So the demand for money is how much money people would like to hold, given the constraints that they face.

Money is one of the forms in which people hold their wealth. At a given time, the total amount of wealth is given. If we want to hold more wealth in the form of money, we must hold less wealth in other forms - savings account, money market funds, time deposits, stocks, etc. An individual's quantity of money demanded is the amount of wealth that the individual chooses to hold as money, rather than as other assets.

Why do people want to hold more money? The most important reason is that money is a means of payment. Other forms of wealth are not used for purchases. The other forms of wealth provide a financial return to their owners. Money, pays either zero (cash or non-interest bearing checking accounts) or very little (some types of checking accounts) interest.

When you hold money, you bear an opportunity cost - the interest you could have ea

4) The interest rate affects consumption spending on big ticket items like cars, furniture, and dishwashers. These are called durable goods because they last several year and people often borrow to buy consumer durables.

How the interest rate affects spending?

3) Excess supply of money and excess demand for funds

Point E shows that when the interest rate is 6%, the quantity of money demanded is $500 billion. If the interest rate falls to 3%, we move to point F, where the quantity demanded is $800 billion. As we move along the money demand curve, the interest rate changes, but other determinants of money demand are assumed to remain unchanged.

We learned that the Fed controls the money supply. It uses open market operations to inject or withdraw reserves from the banking system and then relies on the demand deposit multiplier to do the rest. Since, the Fed decides the money supply, we treat it as a fixed amount. So the interest rate can rise or fall, but the money supply will remain constant unless and until the Fed decides to change it.

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Approximate Word count = 1337
Approximate Pages = 5 (250 words per page double spaced)