There is a popular saying that things are rare and expensive. Too many things are worthless. If there is more money supply, it will naturally depreciate. Interest rate is the price of money, and it will certainly come down. Let's just say it's better for everyone to understand.
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What will be the impact of the increase in money demand?
The most direct impact is the rise in prices. Holding money means that you will suffer losses from currency depreciation all the time, while changing money into gold, real estate and other physical objects can preserve value and even gain. Therefore, in times of inflation, people are usually reluctant to hold money.
Money demand refers to the amount of wealth that people are willing to keep in the form of money. The main factors that influence people to hold a certain amount of money are:
1, people's actual income
People need money, first for consumption, that is, for shopping. And people's consumption level depends on their income level. The higher the actual income, the higher the expenditure level, so the more money is needed. It can be seen that money demand changes in the same direction as the actual income level. If Md is used to represent the required amount of money, and the proportion of the amount of money held in the actual income Y is K, then MD = KY.
2. Commodity price level or price index. People hold money to buy goods and to consume. Therefore, what people need is actually the purchasing power of money, or the number of goods that money can buy. When the price level rises, in order to maintain the purchasing power of the original currency, the amount of nominal money he needs to hold must be increased accordingly. A certain amount of nominal money demand divided by the price level is called actual money demand. If md stands for actual money demand, Md stands for nominal money demand, and P stands for price level or price index, then MD = MD/P.
3. Interest rate The total wealth of each family in a certain period of time is always limited. People must decide the form of wealth they have. They may want to own these wealth in a certain amount of money, but if the proportion of wealth in monetary form is larger, the proportion of wealth in other forms (such as securities and physical assets) will be smaller. Having these other forms of wealth will bring him benefits.
For example, owning wealth in the form of real estate will bring rent, owning wealth in the form of bonds will bring interest, and owning wealth in the form of money will lose this income. This is the opportunity cost of holding money. If someone owns wealth worth 6,543,800 yuan, such as buying bonds or stocks, he can get interest or dividend income or dividend income. For convenience, it is assumed that all non-monetary assets are collectively referred to as bonds. When the annual interest rate of bonds is 10%, the loss or opportunity cost of holding 10000 yuan a year is 1000 yuan. When the interest rate was 5%, the annual cost of holding money was 500 yuan. Obviously, the higher the interest rate, the less people want to put a lot of money in their hands, or the smaller the demand for money. In other words, the amount of money and interest rates change in opposite directions. If R is used to represent the interest rate, the relationship between the actual money needed and the interest rate can be expressed as MD =-hr.