Lesson Notes By Weeks and Term - Senior Secondary 2

Demand for and supply of money

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Term: 3rd Term

Week: 6

Class: Senior Secondary School 2

Age: 16 years

Duration: 40 minutes of 2 periods each

Date:       

Subject:      Economics

Topic:-       Demand for and supply of money

SPECIFIC OBJECTIVES: At the end of the lesson, pupils should be able to

  1. Define the demand for money

 

  1. Explain the motives or reasons for holding money

 

  1. Define the supply of money

 

  1. Explain the factors affecting the supply of money

 

  1. State the Quantity theory of money

 

  1. State the Gresham’s Law

 

  1. Define the value of money

 

  1. Explain the factors affecting the value of money

INSTRUCTIONAL TECHNIQUES: Identification, explanation, questions and answers, demonstration, videos from source

INSTRUCTIONAL MATERIALS: Videos, loud speaker, textbook, pictures

INSTRUCTIONAL PROCEDURES

PERIOD 1-2

PRESENTATION

TEACHER’S ACTIVITY

STUDENT’S ACTIVITY

STEP 1

INTRODUCTION

The teacher reviews the previous lesson on money and capital market institutions

Students pay attention

STEP 2

EXPLANATION

She defines the demand for money. She explains the motives or reasons for holding money. She defines the supply of money and explains the factors affecting the supply of money

She defines capital market and Identifies the financial institutions that operate in the capital market.

 

 

Students pay attention and participates

STEP 3

DEMONSTRATION

She states the Quantity theory of money and the Gresham’s Law. She defines the value of money and explains the factors affecting the value of money

 

 

Students pay attention and participate

STEP 4

NOTE TAKING

The teacher writes a summarized note on the board

The students copy the note in their books

 

NOTE

 

THE DEMAND FOR MONEY

 

The demand for money refers to the desire to hold money. That is, to keep one’s resources (or wealth) in liquid form rather than investing it. The demand for money in economics is known as the Liquidity Preference. Lord Maynard Keynes identified three motives or reasons behind the demand for money. The motives or reasons are:

 

  1. The transactionary motives: People keep money for their day to day transactions. That is, for purchasing their daily requirements, such as food, clothing, etc.

 

  1. The precautionary motives: People keep money with them so as to be able to meet up with unforeseen contingencies. Example, money is held to take care of the unexpected visitors, people falling sick, etc.

 

  1. The speculative motives: This relates to the people’s desires to hold money for the purposes of taking full advantages of investment opportunities. If people think that the rate of interest is likely to rise in future or if prices of stocks are likely to fall, they will withhold money now. On the other hand, if the interest rate is likely to fall in future or if the prices of stocks are likely to increase, people may want to invest their money at once while the prices of stocks are still low.

 

THE SUPPLY OF MONEY

The supply of money is the total stock of money available for use in the economy. This consists of two major items:

  1. Currency in the form of bank notes and coins circulating outside the banking system
  2. Bank deposits in current accounts which are withdrawable by cheques (that is, bank money)

 

FACTORS AFFECTING THE SUPPLY OF MONEY

  1. Bank rate: Bank rate is the rate of interest which the central bank charges the commercial banks for lending money to or from them and discounting bills. If the bank rate is high, commercial banks will be discouraged from borrowing money from the central bank and this will decrease the supply of money.

 

  1. Cash reserves: This is the percentage of deposits commercial banks are expected to keep with the central bank. If the case reserve is high, the supply of money will fall and vice versa.
  2. Economic situations: The central bank reduces the supply of money during inflation and increases it during the period of deflation.

 

  1. Total reserves of the central bank: If the total money supplied by the central bank is high, money supply will also be high and vice versa.

 

  1. Demand for excess reserve: When commercial banks demand for excess reserves, the supply of money will increase.

 

THE QUANTITY THEORY OF MONEY

 

This is one of the theories that try to explain what happens when there is an imbalance between the demand for money (by households and firms) and the supply of money to these economic units. The theory explains that if they hold more money than they require, (that is, if there is an excess supply of money over demand), they will spend the surplus on currently-produced goods and services. That will increase the price level. On the other hand, if they hold less money than they require (that is, there is an excess demand over supply), they will reduce expenditures on goods and services. This will reduce the price level.

 

In summary, the quantity theory of money attributes the effects of differences in the demand for money and the supply of money mainly to changes in the aggregate demand for goods and services. Prof Irving Fisher is the leading founders of this theory.

 

 

GRESHAM’S LAW

Sir Thomas Gresham propounded a theory or law that “Bad money has a tendency to drive out good money. He argues that if some coins have a high content of valuable metal, while others have a low content, holders of coins which have a high content of valuable metal may not want to put them into circulation. They may melt down these coins. There is the tendency for people to continue reducing the content value of coins, thereby increasing the quantity of bad money in circulation.

 

THE VALUE OF MONEY

The value of money refers to the purchasing power of money, that is, the quantity of goods and services which a given sum of money can buy at a particular time. If such a sum of money can purchase fewer goods and services, this will mean that the value of money has fallen. This happens when price rises. But, if a given sum of money can purchase more goods and services, this will mean that the value of money has risen. This happens when price falls. For example, if ₦ 100 can now buy a cup of red oil as against ₦50 which it was sold before, this mean that the value of money has fallen and vice-versa.

 

FACTORS DETERMINING THE VALUE OF MONEY

  1. The price level: The value of money falls with an increase in the price level.
  2. The supply of money and its speed or velocity of circulation: An increase in the quantity of money in circulation with little or no increase in the available goods and services would mean that a larger quantity of money would purchase fewer commodities. The value of money would therefore be low and vice-versa

 

  1. The volume of goods and services: If more goods and services are available while supply of money remains constant, the value of money will increase. This is because more commodities will be bought with a given sum of money. The opposite is the case if less goods and services are available while supply of money remains constant.

 

  1. Inflation and deflation: During the period of inflation, the value of money falls, while the value of money rises during the period of deflation.

 

EVALUATION:

  1. Define the demand for money

 

  1. Explain the motives or reasons for holding money

 

  1. Define the supply of money

 

  1. Explain the factors affecting the supply of money

 

  1. State the Quantity theory of money

 

  1. State the Gresham’s Law

 

  1. Define the value of money

 

  1. Explain the factors affecting the value of money

 

CLASSWORK: As in evaluation

CONCLUSION: The teacher commends the students positively