The Money Market- Money Demand & Nominal Interest Rate?

Question

We know that investments spending depends on real interest rates. Yet the demand for money will depend on nominal interest rates, not on real interest rates. Can anyone explain why money demand should depend on nominal rates?

Please HELP

Answer 1

Investment spending is a decision to  lock into assets that would give returns over a period of time and hence involve aggregating a time stream of benefits net of costs by the use of discounting to present values and necessarily to take into account the expected inflation rate along with the nominal interest rate. There is nothing really like real interest rate: it is a concept that economists use to compute the combined effect of nominal interest rate and inflation rate. So, since investment decisions depend on the nominal interest rate as well as the inflation rate, we say that investment spending depends on real interest rate.

As agains this, demand for money id either for transactions purposes which does not depend on any interest rate in any significant way or for speculative purposes. Here the cost of holding cash and not converting cash intio assets or investment is a short-term decision - people do not consider holding cash indefinitely for long periods. So the involvement of  time is small and inflation rate do not come really into consideration. The cost of holding cash is the short-term nominal interest rate. Speculative demand for Cash is for liquidity and not locked in for long.periods, where investment is for long periods during which inflation rate can influence the rate of return.