What are the exogenous variables that drive demand for and supply of money? Are there variables in common between the two? I think I'm getting caught up with interest rates, as adjusted by the Feds vs the natural return from investment etc. Thanks in advance for any help!


1 Answer 1


The three critical exogenous variables that drives the demand for and supply of money, according to Investopedia, are liquidity, investment, and consumption.

According to theory, liquidity is determined by the size and velocity of the money supply. The levels of investing and consumption are determined by the marginal decisions of individual actors.

All of this is depicted in the IS-LM model which stands for "investment-savings" (IS) and "liquidity preference-money supply" (LM). This was used to explain the economics ideas by John Maynard Keynes in the 1930s. Developed by economist John Hicks in 1937 after Dr. Keynes published his book "The General Theory of Employment, Interest and Money" (1936).


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