Real Money Balances Macroeconomics

real money balances

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Keynes’ real balance equation, however, is not free from defects. In fact, Keynes himself had recognised certain defects in it, which he pointed out later, in his Treatise on Money, as discussed below: 1. In Keynes’ equation, P refers only to the price level of consumption standard value of money, in a narrow sense. The real demand for money is defined as the nominal amount of money demanded divided by the price level. For a given money supply the locus of income-interest rate pairs at which money demand equals money supply is known as the LM curve.

Term real-balance effect Definition: A change in aggregate expenditures on real production made by the household, business, government, and foreign sectors that results because a change in the price level alters the purchasing power of money. There is a cost associated with holding money balances (you give up interest payments), 2. There is no intrinsic value in the money balances you hold except in their use as a medium of exchange. Generally, you acquire money in order to get rid of it - to buy things.

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real money balances: The quantity of money in real terms.

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