While the term money simply refers to the supply of money, the term liquidity relates to the interplay between the supply and the demand for money
People demand money primarily in order to facilitate trade. Money offers the holder a greater purchasing power than any other good
People demand money primarily in order to facilitate trade. Money offers the holder a greater purchasing power than any other good
Money enables an individual to secure a greater variety of goods than any other good could do i.e. it has a much greater purchasing power
Therefore, when people seek more money they do not want more money in their pockets but rather more purchasing power
Therefore, when people seek more money they do not want more money in their pockets but rather more purchasing power
When the central bank embarks on loose monetary policy then, for any given level of purchasing power and demand for money, the increase in the quantity of money supplied will result in a surplus of money , as a rule, no individual is going to hold more money than is required
Consequently, individuals will attempt to get rid of the surplus of money by converting it into (i.e. buying) goods and services. In the process, this will lift the prices of goods and services i.e. reduce the purchasing power of money.
Now most of these money will also find ways into buying financial assets Equities, Gold and Silver , etc. The prices of these assets gets lifted to some good extent artificially in such a regime of money supply.
At the lower purchasing power of money the larger quantity of money supplied will be in line with the quantity demanded
A decline in monetary injections will work towards equating the quantity of money supplied with that demanded
A decline in monetary injections will work towards equating the quantity of money supplied with that demanded
At the higher purchasing power of money, a smaller quantity of money supplied will be in line with the quantity demanded , With a time lag , there will be change in prices of Goods and Services and Financial assets which will follow change in liquidity
Also because of time lag and change in liquidity , change in price of financial asset will be not be simultaneous and may take year or more.
liquidity is the difference between the quantity of money supplied and the quantity of money demanded, which activates changes in the purchasing power of money
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#FrankShostak
@threadreaderapp
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Credits
#FrankShostak
@threadreaderapp
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