<p>They're in monetary units! Let's say an economy has a money supply of <span class="math-container">$100$</span> <span class="math-container">$mu$</span> and a price level of <span class="math-container">$1$</span>. Another economy has the same money supply but a price level of <span class="math-container">$1.5$</span>. Which economy has the bigger <em>real</em> money supply? The first, obviously. In the first hypothetical economy, you can think of the average transaction as one involving smaller amounts of currency. Real money demand will of course depend on nominal income <span class="math-container">$Y$</span>. An increase in nominal income makes people demand more money because there's more transactions to be made. </p>

CC BY-SA 4.0
2018-09-16T00:13:09.730Z
Thank you- just to clarify- although it is in monetary units, these correspond 1:1 with goods right?
ChinG
CC BY-SA 4.0
2018-09-16T00:47:35.980Z
They correspond 1:P to goods
Pedro Cavalcante
CC BY-SA 4.0
2018-09-15T23:12:05.623Z
2019-04-24T03:27:02.477Z
2019-04-24T03:27:02.477Z
Pedro Cavalcante
<p>Standard undergraduate textbooks begin with an exposition of the  money market with the following equilibrium condititon: </p>

<p>$$\frac{M^{s}}{P}=L\left(R,Y\right)
$$</p>

<p>In the above, the LHS is what is defined as "Real Money Supply", and the RHS is defined as "Real Money Demand". My question is the following: does the fact that we divide the LHS by the price level render these two quantities in units of goods? Intuitively, I think these quantities represent the number of goods that can be bought for a given amount of nominal money. What are the units of these quantities? </p>

<money-supply>
Intuition behind Real Money Demand and Real Money Supply
ChinG
# Intuition behind Real Money Demand and Real Money Supply

(Asked by: username_0 on 2018-09-07)

Standard undergraduate textbooks begin with an exposition of the money market with the following equilibrium condititon:

$$\frac{M^{s}}{P}=L\left(R,Y\right)
$$

In the above, the LHS is what is defined as "Real Money Supply", and the RHS is defined as "Real Money Demand". My question is the following: does the fact that we divide the LHS by the price level render these two quantities in units of goods? Intuitively, I think these quantities represent the number of goods that can be bought for a given amount of nominal money. What are the units of these quantities?

**Tags:** money-supply

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## 1 answers

### Answer by username_1 on 2018-09-15. Score: 2

They're in monetary units! Let's say an economy has a money supply of $100$ $mu$ and a price level of $1$. Another economy has the same money supply but a price level of $1.5$. Which economy has the bigger *real* money supply? The first, obviously. In the first hypothetical economy, you can think of the average transaction as one involving smaller amounts of currency. Real money demand will of course depend on nominal income $Y$. An increase in nominal income makes people demand more money because there's more transactions to be made.

> **Comments:**
> **username_0**: Thank you- just to clarify- although it is in monetary units, these correspond 1:1 with goods right?  
> **username_1**: They correspond 1:P to goods  

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