What is meant by the demand for money?

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Posted on (Answer #1)

The phrase “demand for money” might be seen as something of a misnomer.  When we hear the phrase, we might think that it refers to how much money people want.  That is clearly not right because the amount of money people want is essentially infinite.  Instead, the demand for money might better be called the demand for cash or the demand for liquid money. 

When people get money, they have to decide how they want to hold it.  They can hold it as cash or as bank deposits or they can use it to buy things like stocks and bonds.  The demand for money is the amount of money that people want to hold in cash or bank deposits.  It is generally dependent on the interest rate.  The demand curve for money is generally graphed with the interest rate on the vertical axis and the quantity of money on the horizontal axis.  As the rate of interest decreases, the quantity of money that is demanded generally goes up.

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