What types of thimgs determine how much money people demand?

Question

Economics

Answer 1

First of all, it's not just people; it's businesses, too. This said, demand for money is driven primarily by expectations. In good times, people expect to be able to hold onto their jobs, so they confidently take out mortgages and car loans; businesses see the need to expand, so they borrow to buy equipment and supplies. In bad times, the flow reverses; consumers often decide against large purchases (and loans to finance them), businesses put expansion plans on hold.

Answer 2

The above answer is on the right track. The welfare of the economy is an indicator of money demand, but not necessarily a reason.

The primary factor affecting money demand is the interest rate. To put it simply, with low interest rates, it's not as financially beneficial to put money in banks (or other forms of investment), and so people want to carry around more money. When interest rates are high, people would rather keep their money in banks and investments than in their pocket, to make good returns, and so money demand falls.

The economy's state also plays into money demand, as the above poster said, in terms of investor confidence. Even with high interest rates, if investors are afraid of the risk in their investments, they won't invest (depending on how risk-averse or risk-loving the investors are, which varies by individual). Take the current state of the economy, for example. With so many foreclosures in the housing market, people are very wary to make any sort of investment in many fields of the stock market, and so the stock market has been fairly flat, or even declining lately. As a result of the loss in investor confidence, money demand rises.

Both interest rate and investor confidence are key players in determining money demand, but I do feel that the former is slightly stronger in terms of motivation, and much much easier to track.