Principles Of Macroeconomics

Running Head : Principles of Macroeconomics

Principles of Macroeconomics

[Writer 's Name]

[Institute 's Name]

Principles of Macroeconomics

When the demand for money is equal to the supply of money , it usually tends to be the equilibrium situation . Equilibrium in this particular case could be achieved through change in the rate of return . People would generally invest where the rate of return is higher . They use their surplus to buy stock , bonds , and other securities (Case , 2007 ) If there would be any reduction in the money supply due to reduction in

the rate of return , the demand for money balances increases . An equilibrium situation would be achieved when the rate of return fell at that much point where the demand for money and demand for supply meets

Rate of Return too Low

When the demand for money exceeds the demand for supply , there might be some reason that actual rate of return lies below the equilibrium . This means that people want to hold more and more liquid assets , and spends more rather than to keep that money in their pockets or put them in a savings account . Finally , money demand falls as the rate of return increases (Taylor , 2003

Rate of Return too High

It might be possible for some reasons that actual rate of return lies above the equilibrium , where the demand for supply exceeds the demand for money . The impact of this , usually encourages people to invest more rather to keep in a liquid form , and spend less to...