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<p>To my best extent of economics knowledge, I thought money demand is correlated with higher price level, can someone explain why did the author say this?</p>
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<p>I am not sure where you learned this but it’s well known that higher money demand puts downward pressure on prices.</p>
<p>In IS-LM model that you find in literally any modern macroeconomics textbook, the money market equilibrium is given by; <span class="math-container">$P=M/L(y,i)$</span> where P is price level, M money supply and L money demand. See for example, Blanchard et al Macroeconomics, chapters 3-5.</p>
<p>As this relation clearly shows higher money demand (L) means lower price level (P), ceteris paribus.</p>
<p>If you look for intuition, the intuition is that value of money can be thought of as being in essence inverse of price level. So value of money would be <span class="math-container">$1/P$</span> because the higher prices are the less valuable your money are. When there is more demand for money, money becomes more valuable relative to other goods in the economy (keeping all other things constant) and as a result price level has to drop.</p>
<p>This relationship is well known and to my best knowledge there is no mainstream economic theory that would say higher money demand leads to higher not lower price level.</p>

CC BY-SA 4.0
2024-07-26T14:44:11.997Z
2024-07-26T14:44:11.997Z
1muflon1
<p>Increase in demand for money implies that people wants to keep their assets in the form of money rather than bonds etc.Assuming money supply as exogenous variable money demand is greater than money supply this will put upward pressure on interest rate(opportunity cost of money) this results in fall in investment demand.
Aggregate Demand&lt;Aggregate Supply
Unintended inventory accumulation
Puts downward pressure on prices.</p>

CC BY-SA 4.0
2024-07-27T08:02:48.920Z
2024-07-27T08:06:51.787Z
2024-07-27T08:06:51.787Z
user45729
<p>I was reading &quot;Monetary Policy Games and the Consequences of Non-cooperative Behavior&quot; (1985), and this part came up: &quot; In the absence of fully indexed input prices, an expansionary monetary policy in one country raises that country’s output and lowers its real interest rate. The real interest rate movement is transmitted abroad, where its net impact is deflationary. <strong>This is because the lower real interest rate produces a fall in the foreign nominal interest rate and this, in turn, increases foreign money demand. The increased money demand results in downward pressure on foreign prices and output.</strong> Thus, the spillover effects that are channelled through the real interest rate are negative and symmetric across countries&quot;</p>
<p>To my best extent of economics knowledge, I thought money demand is correlated with higher price level, can someone explain why did the author say this?</p>

<macroeconomics><game-theory><money><price-level>
How would an increase in money demand create a downward pressure on prices and outputs?
Benjamin Duan
# How would an increase in money demand create a downward pressure on prices and outputs?

(Asked by: username_0 on 2024-07-26)

I was reading "Monetary Policy Games and the Consequences of Non-cooperative Behavior" (1985), and this part came up: " In the absence of fully indexed input prices, an expansionary monetary policy in one country raises that country’s output and lowers its real interest rate. The real interest rate movement is transmitted abroad, where its net impact is deflationary. **This is because the lower real interest rate produces a fall in the foreign nominal interest rate and this, in turn, increases foreign money demand. The increased money demand results in downward pressure on foreign prices and output.** Thus, the spillover effects that are channelled through the real interest rate are negative and symmetric across countries"

To my best extent of economics knowledge, I thought money demand is correlated with higher price level, can someone explain why did the author say this?

**Tags:** macroeconomics, game-theory, money, price-level

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## 2 answers

### Answer by username_1 on 2024-07-26. Score: 1 | Accepted answer

> To my best extent of economics knowledge, I thought money demand is correlated with higher price level, can someone explain why did the author say this?

I am not sure where you learned this but it’s well known that higher money demand puts downward pressure on prices.

In IS-LM model that you find in literally any modern macroeconomics textbook, the money market equilibrium is given by; $P=M/L(y,i)$ where P is price level, M money supply and L money demand. See for example, Blanchard et al Macroeconomics, chapters 3-5.

As this relation clearly shows higher money demand (L) means lower price level (P), ceteris paribus.

If you look for intuition, the intuition is that value of money can be thought of as being in essence inverse of price level. So value of money would be $1/P$ because the higher prices are the less valuable your money are. When there is more demand for money, money becomes more valuable relative to other goods in the economy (keeping all other things constant) and as a result price level has to drop.

This relationship is well known and to my best knowledge there is no mainstream economic theory that would say higher money demand leads to higher not lower price level.


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### Answer by username_2 on 2024-07-27. Score: 0

Increase in demand for money implies that people wants to keep their assets in the form of money rather than bonds etc.Assuming money supply as exogenous variable money demand is greater than money supply this will put upward pressure on interest rate(opportunity cost of money) this results in fall in investment demand.
Aggregate Demand


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