Higher Price Increase Demand for Money whereas Expectation of Increase Price Level Reduces the Demand for Money: Monetary Approach Discussion(Global Economics)

The monetary approach postulate that the demand for the money is depended on real income

(Y), price level(P), interest rate(I), level of real wealth(W), expected percentage change in the price level(E(p)) and other variables(O). Symbolically it could be expressed as:-

Demand for the money (L) = f(Y, P, I, W, E (p), O)…………… (i)

And indeed in align with the monetary approach I support the claim that the increased price level of the product increases the demand for the money, from the above equation (i), we can infer that there is a direct relation between the price of goods  & services and demand for the money. To take an example, an increase in the price of a unit of Hyundai car from $18000 to $25000 will necessitate and escalated demand by $7000k for the purchase of the vehicle. The demand for the money could be for the transaction motive.

Whereas the demand of money (L) decrease when there is the expectation in the rise in the price level. In reality, the money that we hold now will have the less purchasing power, or it's value decreases as there exists the negative relation between the demand for money and the expectation in the rise in the price level. To take an example the increase in the expectation in inflation rate by 10% will on the one hand increases the value of the products by 10% and on another hand decreases the value of the money by 10%, so the investors rather being worsened off by holding decreased value of money, attempts to maintain his situations better off by rather demanding less money or coming across the opportunity cost of holding cash by investing in other sectors. Whenever the price is expected to rise, there is an incentive to substitute the money by non-money assets whose price may rise with the inflations.

So it could be assorted in align with the monetary approach than the demand of money increases with the increase in the price level and decreases with the expectation of an increase in the price level as investor always wants to maximize their returns and reduce his opportunity cost. But it is equally important to consider other variables like domestic interest rate, supply of money(M1 and M2), real income level as this also has significant impact on demand for the money.

Bibliography

Appleyard, D. R., & Field, A. J. (2014). International Economics. Irwin: McGraw-Hill.