Money, Money Supply, and Money Demand

In this chapter, we have discussed the rudiments of money supply and money demand. We covered the definition of money, characteristics of money, measures of money, and the reliability of money (or monetary aggregates) data. We discussed the balance sheet of banks, with special emphasis on the balance sheet of central banks, by using the T-account tables for all transactors concerned. We have further discussed the functions of banks, and the role of central banks in controlling the monetary policy in the country, in response to both external and internal shocks. We have discussed the effect of sterilized and unsterilized policy interventions by the central bank in the country. We have also treated the evolution of money demand from early writings of Fisher’s equation of exchange, through the quantity theory of moneyquantity theory of money, Cambridge demand for money, liquidity preference demand for money from the perspective of Keynes, modern quantity theory of money, to name a few. We also derived the square root formula of money demand and ended with its criticisms. Finally, considering that some of the problems which have plagued most post-World War II money demand models is its weak microeconomic foundation, we have attempted to provide an alternative improved model, which has a much sound microeconomic foundation, in the next chapter.