Aggregate income adjusts based on the interest rate and price level. Just like the graphs from this week's
lessons, if the price level increases, aggregate income will also increase, causing an adjustment to the
equilibrium level of aggregate income. If the interest rate increases, the cost of borrowing increases, and the
aggregate income decrease, causing a price level drop. So Interest rate is inversely related to aggregate
income and price level.
One example of transaction demand would be my grocery shopping this week, where I could use a debit card
or cash to purchase my groceries. Another example of transaction demand would be my going out to eat this
weekend, where I would buy my meal with my debit card.
One example of asset demand would be buying a car and borrowing money from a bank to pay for the
vehicle. Another example would be my investing in stocks. Both examples are investments where the liquidity
of my investment would cause a longer term to turn that investment into money. I would have to sell the car
or cash out the stocks to return to the liquidity of the transaction demand money. Transactional demand is
money needed to buy things like food, services and gas. This money is needed for the everyday expenditures
which comes from one's income. Now this money ties into transaction demand for money and asset demand
for money. They are all tied together. As demand rises, so does the price and interest rate which is the part of
inflation. With asset money, this is used for investing, purchasing homes, stocks, bonds etc. This money is
also used for your future like your 401K as being an asset to support you in the future. As inflation is the
climate we are in today, the interest rate is high, the demand for goods is high, the prices are high and in my
opinion production or supply chain is low or lower than it should be. We are still saying empty shelves, high
prices and high demand because we can't find or buy the things we need due to lack of or the high prices. The
relationships between rate, income and price level are all tied together and we are seeing the example of these
every day, especially over the last 2 year. It's getting worse. I think the current climate has also allowed me to
really understand the course material in this course as well as the Business Finance course I am taking at the
same time. Price and GDP spending have an inverse relationship in aggregate demand. In addition, industry
experts assess aggregate demand for their prospects. The amount of money saved for purchases, or
transactional demand, varies in direct proportion to GDP. Asset demand is the retention of money as a store
of value for future use. The interest rate varies inversely with asset demand because it is the cost of keeping
idle money. Carrying cash in your pocket to buy food, kitchenware, train tickets, and so on are examples of
money transaction demands. Some people consider cash to be an investment, similar to stocks and bonds.
Using cash as a store of value necessitates keeping it as a liquid asset. An example of an asset demand for
money is a person who owns stocks, bonds, jewelry, artwork, a home, a savings account at his credit union,
and $5,000 stashed away in a safe box in his basement. A rise in aggregate demand raises total output, which
in turn raises the demand for money. A rise in aggregate demand raises total output, which in turn raises the
demand for money. This increases the demand for money, which raises the interest rate. Rising prices (also
known as inflation) cause average interest rates to rise in an economy. In contrast, a drop in the level of prices
(deflation) will result in a drop in the average interest rates of an economy. There are two types of demand for
money. There is transaction demand and asset demand. Transaction demand is the amount of money needed
for daily transactions by individuals to companies. An example would be money carried on your person to
pay for things such as groceries and gas. Asset demand is the demand for liquid financial assets. An example
of asset demand is the money we put in the bank, stocks, bonds etc...
The relationship between interest rate, aggregated income, and price level is like a cycle; each one is an effect
of the other. For example If there is a price level increase (inflation) there will be an increase in average
interest rate and a rise in aggregated demand raises the aggregated output which lead to an increase in demand
for money.
Transaction demand for money:
1. Going to the grocery store and purchasing groceries for the household.
2. Going to the gas station and purchasing gas for the car with money that is in my pocket.
Asset demand for money:
1. I was recently paid direct deposit from my job and the money was placed in my banking institution by
my employer.
2. I have to check my daily money in the stock market to see if I have made a gain on my investment or
a negative for the day.
Individuals and businesses want to borrow more money at lower interest rates and invest the money in capital
and consumer purchases. When this happens, aggregate demand will increase. However, when interest rates
are higher the central banks will make more money from the interest payments that they receive from
borrowers. A higher price level will make a higher interest rate. Price level is the average of current prices
across the entire spectrum of goods and services produced in a economy. Transaction demand for money is
the amount of money required for current transactions of companies and individuals. For example, carrying
money in your wallet that you plan to spend at the store to buy toiletries for the month for your household.
Another example is having money on hand for a haircut that you get routinely. Asset demand for money is
the demand for highly liquid financial assets (foreign currency or domestic money) that is not dictated by real
transactions like trade or consumption expenditure. An example would be someone who has stocks and bonds
they are holding the money as a store of value. If someone has jewelry, artwork, a home, or a savings account
with their credit union, and has $4,000 in cash hid away. In an emergency the cash is most liquid asset that
the person has and is more spendable than artwork or jewelry. Our reliance on money can be broken down
into two categories; money that we want to use immediately (transaction demand) and money we assign to
use later (asset demand). These categories are similar because it is still our money, and we choose when we
want to invest it. They are different because one form is for use now with the value then being transferred to
the cost, or purchase, of a good or service (transaction demand) while the other is used in a way that can
increase, or decrease, in value and is specifically saved for future use (asset demand).
Price level, interest rates and aggregate income are intertwined as aggregate income is the sum of money that
citizens earn in the economy, which is monitored by ‘the Fed’. ‘The fed’ can change monetary policies which
can change interest rates and price level.
Transaction demand for money: 1) I needed to buy lunch today since I did not pack a lunch; I used my debit
card to pay for my lunch 2) When I need gasoline, I go to the gas station and use my debit card or cash to pay
for it.
Asset demand for money: 1) every year on my birthday, my grandfather would give me a savings bond. 2)
Each paycheck my spouse and I receive, we put money into our savings account.
There are two forms of demand when it comes to money, one is transactional demand. Transactional demand
is money that we keep for purchases, which is directed with GDP. Asset demand is money that we keep for
store value to use at our discretion. Asset demand can be a credit card it is some form of money the comes
with an interest rate. Interest rate, say that you are wanting to purchase a new car but you have not saved
enough to pay cash for this new car. There is something called financing. The interest rate is something that
is charged when you finance a loan this is something that you the borrower will pay annually it is a
percentage on you loan. Aggregate income is the total income that has not been adjusted for inflation, for
taxes, aggregate income is a form of GDP. Price level it is the general price level that is measures our overall
price for goods and services, in our income or monetary union. A transaction demand example for me would
be money that I have on hand to possible do my weekly or monthly grocery shopping, or money that have on
hand to purchase a airline ticket to Las Vegas. Asset demand for money is having a CD account, and or a
money market account. It should come as no surprise that there are two distinct forms of money demand
given the functions of money. The demand for transactions is the first, and the demand for assets is the
second. The transaction demand for money is using money as a medium of exchange. We exchange money
for a service. For example, if I want a haircut I would trade money for the haircut. Or even if I wanted a
meal. I would pay the chief in money for the exchange.
Asset demand uses the liquidity of cash as the advantage of holding cash. The disadvantage of holding
money as an asset is that there is very little or no return on this asset. This refers to stocks or holding onto
jewelry that is worth a lot of money that could be exchanged at a later date.
