Monetary theory is a subarea of macroeconomics that describes the relationship between the stock of money and the macro economic system. Monetary theory analyzes the role of money in macroeconomic system in terms of money demand, money supply, and the natural tendency of the economic system to adjust to the point that balance supply and demand money, the point called the monetary equilibrium. A phenomenon such as inflation can be associated with an excess supply of money on demand, cause each unit of money to buy less. Theoretically, the system of macroeconomic balance and blend for one condition necessary for macro-economic balance is a monetary equilibrium.
Monetary theory assumes that the money supply set by the monetary authority, and can be changed if necessary in the public interest because of the demand for money is naturally beyond the control of public officials. Aggregate income determines the amount of money households and businesses plan to spend in the near future. And money can be used for short-term and long term.
Money ownership households and businesses will not be required to purchase in the near future can be invested in long-term assets (stocks and bonds), which earns revenue.
Monetary theory assumes that the money supply set by the monetary authority, and can be changed if necessary in the public interest because of the demand for money is naturally beyond the control of public officials. Aggregate income determines the amount of money households and businesses plan to spend in the near future. And money can be used for short-term and long term.
Money ownership households and businesses will not be required to purchase in the near future can be invested in long-term assets (stocks and bonds), which earns revenue.
Money ownership earning little or none. When ownership of the money used to buy stocks and bonds, money demand decreases, and demand for stocks and bonds rose. Rising interest rates decrease the demand for money as the ownership of money drawn into the purchase of bonds. Lower interest rates cause bond becomes less attractive, increasing demand for money.
When there is inflation means that money be better used elsewhere, perhaps in purchasing gold, silver, or real estate. Inflation reduces the demand for money, but deflation create an attractive investment hoarding money, increasing the demand for money. Higher prices will increase the demand for money, because money needed to finance the transaction more expensive. Inflation reduces the demand for money at first, but when inflation stopped, the demand for money will level out at a higher level than existed before inflation began.
When the monetary authority changes the money supply, macro-economic system to adjust to bring demand for money in accordance with the money supply. If the supply of money increases while the economy is in recession, the extra money might be flowing into the stock and bond markets, stimulate business. As economies develop, grow revenue, and demand for money grows, capturing the provision of money and restore monetary equilibrium. If the supply of money increases while the economy is at full employment, additional money will lead to an increase in demand relative to supply goods. Prices will rise until the value of real (inflation adjusted) of the money supply has fallen enough to stop inflation.
Monetary theory supplies the theoretical foundation for monetary policy, relating to the regulation of growth rate of money supply. Economists do not agree, whether in the money supply growth rates should be accelerated and slowed down to meet the real needs of the economy, or whether the money supply growth rate should remain at a fixed amount, probably between 3 and 5 percent per year. Many contemporary economists who argue that money supply growth rate is still the best guard against inflation and economic instability.
When there is inflation means that money be better used elsewhere, perhaps in purchasing gold, silver, or real estate. Inflation reduces the demand for money, but deflation create an attractive investment hoarding money, increasing the demand for money. Higher prices will increase the demand for money, because money needed to finance the transaction more expensive. Inflation reduces the demand for money at first, but when inflation stopped, the demand for money will level out at a higher level than existed before inflation began.
When the monetary authority changes the money supply, macro-economic system to adjust to bring demand for money in accordance with the money supply. If the supply of money increases while the economy is in recession, the extra money might be flowing into the stock and bond markets, stimulate business. As economies develop, grow revenue, and demand for money grows, capturing the provision of money and restore monetary equilibrium. If the supply of money increases while the economy is at full employment, additional money will lead to an increase in demand relative to supply goods. Prices will rise until the value of real (inflation adjusted) of the money supply has fallen enough to stop inflation.
Monetary theory supplies the theoretical foundation for monetary policy, relating to the regulation of growth rate of money supply. Economists do not agree, whether in the money supply growth rates should be accelerated and slowed down to meet the real needs of the economy, or whether the money supply growth rate should remain at a fixed amount, probably between 3 and 5 percent per year. Many contemporary economists who argue that money supply growth rate is still the best guard against inflation and economic instability.
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