Money Demand vs Money Supply
Money Demand and Money Supply are two Money & Monetary Policy concepts in AP Economics that students often mix up. In short: money demand is money demand is the amount of wealth people choose to hold as money rather than in interest-bearing assets. Meanwhile, money supply is the money supply is the total amount of money circulating in an economy, including cash and checkable deposits. Here is how they compare side by side.
Money demand is the amount of wealth people choose to hold as money rather than in interest-bearing assets.
It slopes downward against the nominal interest rate, which is the opportunity cost of holding money. People hold money for transactions and as a precaution. Money demand shifts with the price level and real GDP.
The money supply is the total amount of money circulating in an economy, including cash and checkable deposits.
Central banks influence it through open market operations, the reserve requirement, and the discount rate. Common measures are M1 (most liquid) and M2 (broader). Changes in the money supply affect interest rates and aggregate demand.
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