Intermediate Macroeconomics Ch4 notes

Intermediate Macroeconomics Ch4 notes - Chapter 4:...

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Chapter 4: Financial Markets The Demand for Money Money has the functions of 1). Standard of account. 2). Stock of value. 3). Medium of exchange. and it includes currency in circulation, deposits, etc. An alternative kind of asset/wealth is Bonds which is not money but it pays interest. M d is demand for money/cash and it is proportional to income level, but negatively related to interest rate. M d = $Y L(i) (-) $Y is nominal income and i is interest rate. The Supply of Money This is the central bank or monetary authority which determines the supply of money, M s . However, the central bank can only choose to control either the money supply or the interest rate! Equilibrium in Financial Market It requires that money supply be equal to money demand M s =M d , then M = $Y L(i). An increase in nominal income increases the level of economic transactions, which increases the demand for money at any interest rate. Given a fixed money supply, it leads to an increase in interest rate. An increase in money supply by the central bank leads to a decrease in interest rate, given a constant level of money demand. Monetary Policy and Open Market Operations Open Market Operation (OMO) is a way that the central bank can do in order to change the money supply in the economy. If it wants to increase the amount of money in the economy, then it will buy bonds and pay for the sellers by creating money, vice-versa. This process is called OMO because the transactions take place in the “Open Market”
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This note was uploaded on 04/05/2009 for the course ECIF ECIF200 taught by Professor Henry during the Spring '09 term at University of Manchester.

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Intermediate Macroeconomics Ch4 notes - Chapter 4:...

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