Finance: Exploring Money Demand Factors and Predicting Future Prices

This finance assignment solution delves into the various factors that influence the demand for money, including inflation, interest rates, consumer spending, precautionary motives, and international factors. It explains how higher inflation increases money demand due to rising prices, while higher interest rates on bonds decrease the demand for money as investors prefer bonds. Increased consumer spending also raises money demand as investments are liquidated for purchases. The assignment further discusses the impact of consumer expectations and currency fluctuations on money demand. Additionally, it provides a prediction on the price of a new laptop (decrease) and a new car (increase) six months in the future, justifying these predictions based on technological advancements and rising production costs, respectively. Desklib provides this solution along with other solved assignments for students.

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There are various factors that tend to influence the demand for money. Some of the critical
factors in this regards are highlighted as follows.
The first factor influencing money demand is inflation. This is because this tends to impact
the price of various goods and services that are consumed. Typically higher inflation would
imply that there would be increased demand for money on the part of the consumers to fulfil
their needs. On the other hand, a decrease in the price level or deflation would tend to lower
the demand for money owing to the cheaper availability of goods and services (Mankiw,
2014).
The second factor influencing money demand is interest rates. Wealth can be stored in the
form of money and bonds. Assuming equal interest on both, money would be a preferred
store of wealth owing to the underlying ease. However, when there is an increase in the
interest rates given by bonds, then there is a higher tendency on the part of investors to buy
bonds. Hence, the lower interest would tend to increase the demand for money as it is more
attractive than bonds at this interest rate (Krugman & Wells, 2014).
The third factor influencing money demand is spending by consumers. When there is
increased spending by the consumers, there is an increase in the demand for money as the
various investments are liquidated so that money is available for making the purchases. This
is typically witnessed near Christmas when there is high consumer spending and hence
demand of money is higher (Mankiw, 2014).
Another factor which would influence money demand is the presence of precautionary
motives on the part of the consumers. For instance, consider a situation where the consumers
expect that doomsday is approaching. In such a situation, there would be higher propensity to
spend and lower tendency to invest which would enhance the demand for money. On the
other hand, consider a situation where the consumers would expect lower prices of a good in
the future and therefore continues to save in the present for deferring the purchase to the
future (Moffatt, 2017).
The demand for money is also impacted by international factors considering the fact that
investments in the host country are made by the foreigners and also the currency fluctuations
do tend to occur which may influence the other factors that have been highlighted above. For
instance, if the consumers expect the currency to depreciate, then consumer spending may

increase so that goods are purchased before the currency depreciates and hence money
demand would be increased (Krugman & Wells, 2014).
With regards to the price of a new laptop and a new car, six months down the line,
consideration needs to be given to the various factors that tend to potentially impact price of
these goods. In context of laptop, technological developments are taking place on a rapid
basis and therefore newer models are released by various vendors on a frequent basis. As a
result, it would be correct to expect that a particular laptop selected today would be available
at a discount (i.e. lower price) six months in the future as more advanced laptop models
would have hit the market by then, which would result in lowering demand of the older
models and consequent decline in prices. With regards to the car, the prices of a particular
model selected today may increase after six months owing to the higher costs of production.
This is apparent from the rising costs of steel and other input materials (owing to trade war
with China) coupled with higher tariffs (Domm, 2018).

References
Domm, P. (2018) Here’s how much your next car could cost if Trump auto tariffs go
through, Retrieved from https://www.cnbc.com/2018/07/18/heres-how-much-
your-next-car-could-cost-if-trump-auto-tariffs-go-thro.html
Krugman, P. & Wells, R. (2014) Macroeconomics. 3rd ed. London: Worth Publishers.
Mankiw, G. (2014) Principles of Macroeconomics. 6th ed. London: Cengage Learning.
Moffatt, M. (2017) What Is the Demand For Money?, Retrieved from
https://www.thoughtco.com/demand-for-money-economics-definition-1146301