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Factors impacting aggregate money demand

Describe the three main factors that determine aggregate money demand. Illustrate, with examples, how changes in these factors alter aggregate money demand.

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The demand for money is the quantity of monetary assets, such as cash and checking accounts, that people choose to hold in their portfolios. Choosing how much money to demand is thus a part of the broader portfolio allocation decision. Here, although we primarily consider the Aggregate, or total, Demand for money, the same economic arguments apply to individual money demands. Thus, it can be said, the Aggregate Demand for Money is the sum of all individual money demands.

The macroeconomic factors that have the greatest effects on aggregate money demand are - i ) the price level, ii) the real income, and iii) the interest rates.

(i) The Price Level: Higher prices increase people's need for liquidity and thus raise the aggregate money demand. The ...

Solution Summary

The solution explains the concept of aggregate demand very well and the main factors that determine AD - Price Level, Real income and interest rate. The solution is very detailed and illustrative with lot of examples. The response explains the concepts very well and in detail. It is ideal for students looking to get a detailed understanding of the topic.