Explain the factors that control the demand and supply for money in the economy

Both individuals and businesses may have various reasons for wanting to hold their assets in cash rather than in more permanent assets. These reasons taken together are known as liquidity preferences. It may be true that a person or corporation is accumulating cash for a large purchase. It may be that cash is viewed as the most trustworthy way to hold assets.

In a complex modern economy, the nation's central bank may try various tools and techniques to influence the supply and demand for money - both cash and other assets. When the demand for money rises, the 'price of money,' the interest rate, also rises. In a healthy economy, money is supplied by savers and demanded by borrowers according to interest rates, which are influenced by a central bank. A balance of supply and demand at a reasonable interest rate is a sign of a healthy economy, because demand for money in turn creates demand for other goods and services.