DEMAND AND SUPPLY OF MONEY

DEMAND FOR MONEY:  
Money is a stock variable. Its stock refers to its quantity in the economy as a whole at a particular point of time. The demand and supply for money is fundamental to many issues in macroeconomics. The demand for money arises from the fact that it is an asset for its holders. 

Due to its acceptability, people hold it not only for paying debts, but also as a liquid asset, which is easy to be converted into other goods and services. As such the demand for money comes from the general public. The supply comes from the producers, who consist of the banking system and the government. A study of the demand for money is, therefore, concerned with the constituents of the demand for money and the reasons for which public makes a demand for money. A demand for money function is an equation that depicts as to what determines the amount of real balances the public deserves to hold. A simple demand for money function is the quantity theory of money equation (M/Py^d =kY). Where, k is a constant and measures the amount of money people hold for every unit of their income A more realistic demand for money has been given in the form of IS LM model. It assumes that (M/P)^d

 NOMINAL AND REAL CASH BALANCES:
Nominal cash balances are money or the current purchasing power of a unit of money. Real cash balances are money of some base year’s purchasing power. A nominal unit of account (a rupee or a dollar) is always a unit of account; but it varies from time to time in its purchasing power due to the changes in the general price level. Hence, the real value of a nominal unit of account keeps on changing over time. 

Real value comparisons, therefore, involves the selection of a base year with the wholesale price index number as hundred. A unit of account during that year had a certain amount of purchasing power at the prices prevailing during that year. The average value of the index number of the year for which the changes in the price level are to be found out is to be calculated. If the average value of index number has risen as compared to the base year then the real value of the unit of account would decrease and if it has gone down then the real value of a unit of account will increase, in comparison to the base year.  

The real cash balances mean the nominal cash balances divided by the price level. If M is the nominal cash balances and P is the price level, then the real cash balances will be M/P. Whenever P changes the distinction between nominal and real cash balances would be more relevant.