Introduction
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MD, like the demand for any other good, is a real demand – it’s demand for the actual services yielded by the possession of a real stock of money, & not simply a demand for a nominal amount of cash denominated in $ or any other currency. 

If MD stable (i.e. responds in clearly defined way to a few key variables), then changes in MS will have relatively predictable impact on Ps & nominal income – if the case, & MS can be controlled effectively, Monet authorities have great influence.  

Monetarists: generally argue that i.) MD is relatively stable (implying stable if not constant velocity) & ii.) that monetary authorities can control MS effectively – both reinforce belief in efficacy of Monetary policy. 

Keynesians: generally argue that i.) MD relatively unstable (implying great variability in velocity) & ii.) that MS effectively endogenous beyond authorities’ control.  – Play down imp of Monet Pol per se & advocate superiority of Fiscal Policy.

Factors Influencing MD: Broad agreement that

i.) Income (however defined) - positively; & ii.) Interests rates (expected inflation may also; but would expect this to be reflected in nominal i. rate changes.) – negatively. 

(supported by almost all empirical evidence, but considerable variation in values of regression coefficients)

Point worth Mentioning

-         Low interest rates will reduce unearned income (pension, banks account etc…), thus reduce current disposable income.  Given that Income is the only (Keynes) major (Baumol) determinant of Transactions & Precautionary money demand, a reduction in income due to an interest rate cut will have the effect of reducing these money demands.  Keynes argued that these money demands were i. rate insensitive, & Baumol that the relationship was inverse.  (But also bear in mind fact that lower i. rates: lower mortgage payments… increases real ‘effective’ disposable income). 

Other Notes in this Category

1. Classical Monetary Theory – The Traditional Quantity Theory
2. Essential Functions of Money
3. Introduction
4. Post-Keynesian Modifications to the Demand for Money
5. The Keynesian Analysis of the Demand for Money
6. The Revival of the Quantity Theory (Friedman & the ‘Chicago School’)

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