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The Control of Money Supply & Demand of Money

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Submitted By aochoa4
Words 1495
Pages 6
Arlene Ochoa
Professor Jim Davis
Econ 1 C1
June 20, 2013
The Control of Money Supply & Demand of Money

Today, we live in a world of scarcity where resources are limited and the choices one make has become so vital the economy. In the US, the government, the Federal Reserve, have control on the effect of supply and demand and money growth. As both supply and demand for money each depend on the interest rate, we specifically look at how inflation effects supply and demand on money. There are differences of money supply and demand for money; where it comes from and how it’s demanded. Given there are many variables that can effect money supply and the demand for money, we will focus on where it comes from and how inflation effects it.
In the book, The General Theory of Employment, Interest, and Money by John Maynard Keynes, he explains liquidity factors in economic interest rates that balance supply and demand for money. There are two different types of interest rate that help explain, in monetary terms, how much borrowers pay for borrowed funds. Generally, during a period of inflation where prices increase, nominal interest can be misunderstood. As the nominal interest rate rises or falls, it can be misleading as to how much the borrower is truly borrowing and how much the lender is receiving. When the borrower repays the principle loan, they lender may not be able to purchase as much goods and services, then when originally loaned. This is because when the loan was initially issued the money was worth more than when the borrower repaid the loan. Once the borrower receives their loan, they should purchase goods and services before prices rise, an inflationary premium. On the other hand, the real rate of interest suggest as inflation occurs, the borrower must pay an interest premium for early availability of funds. This increases the costs of

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