AP MacroeconomicsMoney & Monetary Policy
Real Money Balances
Real money balances (M/P) are the money supply adjusted for the price level — the purchasing power of money rather than its dollar amount.
Dividing the nominal money stock M by the price level P gives the real quantity of goods and services that money can buy. What people actually want to hold is a stable level of real balances, so if prices double, holding the same nominal money halves its real value. This is the variable on the horizontal axis of the money market in many intro and intermediate models.
Formula / Example
Real money balances = M / P