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I have a question regarding the infographic above. It says demand for money rises when money supply is low and demand for money reduces when money supply is high. Why exactly is that the case? Why would the overall amount of something make someone want a unit of that thing less? For instance, why would I want 100 dollars when the money supply is 1,000 dollars, but only want 10 dollars when the money supply increases to 10,000 dollars?

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have a question regarding the infographic above. It says demand for money rises when money supply is low and demand for money reduces when money supply is high. Why exactly is that the case?

This is not the case. Change in supply does not necessarily lead to changes in demand.

Moreover, QTM does not claim that decrease in money supply leads to increase in demand for money. In fact it implies exactly the opposite.

QTM can be described via following relationship:

$$MV=PY$$

Where $M$ is money supply, $V$ velocity of money, $P$ is price level and $Y$ is real output.

$MV$ can be viewed as effective supply of money (since higher velocity means one dollar is used for multiple transactions), and $PY$ can be viewed as quantity of money demanded.

Monetarists viewed $V$ as constant in long term so when either $M$ or $MV$ falls the $PY$ has to fall as well, which is exactly opposite of what the infographics asserts.

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  • $\begingroup$ So what is the infographic trying to say? $\endgroup$ Commented Nov 22, 2022 at 0:23
  • $\begingroup$ @AnthonyFallone I have no idea. My best guess is that whoever made the infographic has poor understanding of how QTM works. It’s not like random infographics is some sort of terminal wisdom. $\endgroup$
    – 1muflon1
    Commented Nov 22, 2022 at 7:11
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Lower money supply with demand constant means that there will be more demand for one money unit.

Think of it like this: We have a tiny economy, for the sake of simplicity, let's say it only consists of apples and dollars. Apples are a thousand, and so are the dollars. The entire quantity of money should let you acquire all the products of this economy[1]; therefore, 1,000 apples = 1,000 USD => 1 apple = 1 USD.

If you increase the quantity of dollars, each dollar corresponds to less than an apple, because of [1]. So, if you printed another 1,000 USD, you'd have a new exchange rate: 1 apple = 2 USD.

The demand of 1 apple has remained the same, but the demand for one money unit has cut in half, because 1 USD can only acquire 0.5 apples.

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  • $\begingroup$ But wouldn’t the demand for money double since now twice as many dollars are needed to get 1 whole apple? $\endgroup$ Commented Dec 25, 2022 at 0:09

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