<p>Always keep in mind that the <strong>total quantity of money in the economy
is not altered by the attempts of individuals to change their own holdings
of money</strong>.</p>
<p><strong>The currency</strong> or checking account balance that one person
uses to buy or sell a bond <strong>only passes into someone else's hands.</strong></p>
<p><strong>While any one economic agent can increase or decrease the
quantity of money that they hold, all economic agents taken together
cannot change the quantity of money that they hold because the quantity
of money is fixed.</strong></p>
<p>Currency and bank account balances can move from
one agent to another, but only the Fed can change the total amount of
money that everybody holds in aggregate.</p>

CC BY-SA 4.0
2022-06-23T15:16:45.433Z
If someone can please support this answer with a simple example involving numerical values, it would be of great help. Thanks
Rakesh Poddar
CC BY-SA 4.0
2023-03-21T19:53:14.737Z
Can you please help me with the correct answer? I have just started learning economics 2 years ago from my school. I will be very much thankful to you sir.
Rakesh Poddar
CC BY-SA 4.0
2022-06-23T15:15:42.063Z
2022-06-23T15:15:42.063Z
Rakesh Poddar
<p>Here is an example graph of Money Market Equilibrium</p>
<p><a href="https://i.sstatic.net/h0eZQ.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/h0eZQ.png" alt="enter image description here" /></a></p>
<p><strong>The chain effects when interest rate is 8% are :</strong></p>
<p>Excess Demand for Money =&gt; So, People would sell Bonds =&gt; Bond Prices goes Down =&gt; Interest Rate Goes up to 10% to achieve Equilibrium</p>
<p><strong>I am understanding the chain effects, But I am very confused in this thing.</strong></p>
<p><strong>Say, at the 8% rate of interest, Money Demand = $225</strong></p>
<p><strong>----&gt; People  want to hold $225 in their pockets</strong></p>
<p>Now Money Supply as we know is fixed at $200</p>
<p><strong>----&gt; Only this much, i.e $200 is available in their Pockets</strong></p>
<p><strong>Then how is it that People can sell Bonds (Which will lead to Chain Effects) to get 225 in their Pockets?</strong></p>
<p><strong>Where is this extra 25 coming from if we only have $200 in currency in our economy?</strong></p>
<p>Please enlighten me as I think, what am I am understanding the Demand for Money means and how it works has some holes in them.</p>
<p>Thanks in Advance</p>

<macroeconomics><supply-and-demand><interest-rate><money-supply><bonds>
Chain effects when Money Demand is greater than Money Supply
Rakesh Poddar
# Chain effects when Money Demand is greater than Money Supply

(Asked by: username_0 on 2022-06-14)

Here is an example graph of Money Market Equilibrium

[![enter image description here](https://i.sstatic.net/h0eZQ.png)](https://i.sstatic.net/h0eZQ.png)

**The chain effects when interest rate is 8% are :**

Excess Demand for Money => So, People would sell Bonds => Bond Prices goes Down => Interest Rate Goes up to 10% to achieve Equilibrium

**I am understanding the chain effects, But I am very confused in this thing.**

**Say, at the 8% rate of interest, Money Demand = $225**

**----> People want to hold $225 in their pockets**

Now Money Supply as we know is fixed at $200

**----> Only this much, i.e $200 is available in their Pockets**

**Then how is it that People can sell Bonds (Which will lead to Chain Effects) to get 225 in their Pockets?**

**Where is this extra 25 coming from if we only have $200 in currency in our economy?**

Please enlighten me as I think, what am I am understanding the Demand for Money means and how it works has some holes in them.

Thanks in Advance

**Tags:** macroeconomics, supply-and-demand, interest-rate, money-supply, bonds

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## 1 answers

### Answer by username_0 on 2022-06-23. Score: -2

Always keep in mind that the **total quantity of money in the economy
is not altered by the attempts of individuals to change their own holdings
of money**.

**The currency** or checking account balance that one person
uses to buy or sell a bond **only passes into someone else's hands.**

**While any one economic agent can increase or decrease the
quantity of money that they hold, all economic agents taken together
cannot change the quantity of money that they hold because the quantity
of money is fixed.**

Currency and bank account balances can move from
one agent to another, but only the Fed can change the total amount of
money that everybody holds in aggregate.

> **Comments:**
> **username_0**: If someone can please support this answer with a simple example involving numerical values, it would be of great help. Thanks  
> **username_0**: Can you please help me with the correct answer? I have just started learning economics 2 years ago from my school. I will be very much thankful to you sir.  

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