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Real Money Balances Effects

Real money balances measure the purchasing power of the stock of money. For example, consider an economy that produces only bread. If the quantity of money is $ 10, and the price of a loaf is $ 0.50, then real money balances are 20 loaves of bread. That is, at current prices, the stock of money in the economy is able to buy 20 loaves.
The demand for money is the desired holding of financial assets in the form of money, that is, cash or bank deposits. Real money balances is the real value of the amount of money held by a person, household or firm or the amount in circulation in the economy or the real value of money balances, their purchasing power in terms of goods 4.8K views.

Real Money Balances Effect

A change in the real money supply will shift the LM curve. Let us consider the effect of an increase in real money supply as a result of which the money supply schedule shifts to the right. At the given level of income and hence with the given demand for real money balances, there is now an excess supply of money.