... The demand for M1 will basically depend on the opportunity cost of not holding M1 money, i.e. saving it instead of spending it. The interest rate is, by definition, the opportunity cost of holding money, i.e. by keeping £20 in my pocket I am losing out on £20*the interest rate, which would be more, if only by a small margin. It is becoming clear, even only after scraping the surface of this project, that the interest rate is likely to be an important factor affecting the demand for money. Economic theory suggests that certain factors can influence the demand for money, theses will be included in econometric analysis but may not be included in the final model for various reasons that I shall come to later. An obvious factor that affects the demand for money is consumer expenditure. If people want to buy more goods they need more money. During periods ...

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