Question

In Lecture 8, we discussed a simple economy with three person each producing one unit of a product. In that economy, suppose payment technology is instant in the purchase of apple, but the money transfer takes x days in the purchase of coffee and tea. Assume price level is Po. Then, what is the nominal money demand and real money demand in the economy?

Answer 1

Nominal Money Demand and Real Money Demand:- Commonly, the nominal demand for money grows with the level of nominal output (price level times real output) and lowers with the nominal interest rate. The real demand for money is explained as the nominal amount of money demanded divided by the price to the price level. For example, if prices go up by 20%then individuals need 20% more money for transactions.
So if the prices of the apple go up then people will increased their nominal money demand. But in the case of coffee and tea the money transfer takes x days in purchase, the nominal money demand will not increased.The real money demand for apple will increase according to their price level and in case of coffee and tea, the real money demand will not increased.