How to Calculate The Demand Real Balance Money Demand

What is Demand Real Balance?

The demand real balance (DRB) is a monetary concept that represents the difference between the money supply and the money demand in an economy. It is calculated by subtracting the money demand from the money supply. A positive DRB indicates excess money supply, while a negative DRB indicates excess money demand.

Understanding the demand real balance is essential for central banks and policymakers to make informed decisions about monetary policy. It helps in determining whether the economy needs more money supply or tighter monetary conditions.

The Formula

The demand real balance is calculated using the following formula:

Where:

• Money Supply (M) - The total amount of money available in the economy.
• Money Demand (D) - The total amount of money people and businesses want to hold.

The result can be interpreted as follows:

• If DRB is positive, it indicates excess money supply.
• If DRB is negative, it indicates excess money demand.
• A DRB of zero indicates a balanced money market.

How to Calculate the Demand Real Balance

To calculate the demand real balance, follow these steps:

1. Determine the total money supply in the economy.
2. Determine the total money demand in the economy.
3. Subtract the money demand from the money supply to get the demand real balance.

You can use the calculator on the right to perform this calculation quickly and accurately.

Worked Example

Let's consider an example to illustrate how to calculate the demand real balance.

Suppose the money supply in an economy is $1,000 billion, and the money demand is $800 billion. The demand real balance can be calculated as follows:

In this case, the positive DRB of $200 billion indicates that there is excess money supply in the economy.