Question

How will the following two events affect the demand for money? In both cases, specify whether there is a shift of the demand curve or a movement along the demand curve, its direction, and briefly an explanation why.

a. The is an increase in inflation

b. The economy picks up and GDP increases while unemployment decreases.

Answer 1

a) an increase in inflation will cause the demand for money to increase because when prices increase , more money will be needed to conduct every transaction since inflation. has gone up  , so transaction demand for money will increase. This will cause an upward movement along the same demand curve .

b ) increase in GDP will cause the money demand to increase causing the money demand curve to shift right i.e at every price more money will be demanded .M^d = kPY where M^d is money demand , k = constant and PY = nominal GDP . SO increase in gdp will cause increase in money demand as increased gdp implies more income so number of transactions will increase so money demand increase at every price .