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27 April, 09:01

Consider the portfolio choice theory of money demand. how do you think the demand for money will be affected during a hyperinflation (i. e., monthly inflation rates in excess of 50%) ?

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  1. 27 April, 10:41
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    During inflation, it is generally known that the demand for a good exceeds its supply, or the demand for a good remains the same, whereas its supply is smothered.

    Inflation growing at an accelerated rate is known as hyperinflation.

    According to the portfolio choice theory of money demand, the demand for money is affected by inflation risk. Higher fluctuations in the real return of money would arise due to the hyperinflationary environment, this thereby causes the demand for money to decrease.

    Instead of holding onto money, people would start investing in other assets, whose real returns are not adversely affected by hyperinflation.
  2. 27 April, 11:38
    0
    The demand for money decreases sharply.

    Explanation:

    The portfolio choice and Keynes's theory of demand for money both proposes that as the returns expected on money falls, its demand also falls. When there is an increase in interest rate, it leads to a decrease in the expectation placed on returns on money thus leading to a decrease in demand for money.
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