Lec 7 Theory of money demand.ppt - Theory of money demand...

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Lecture 7 Mentor: Pham Xuan Truong [email protected] Theory of money demand
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Content I Portfolio theories of money demand II Transactions theories of money demand
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Background Recall that money serves three functions: it is a unit of account, a store of value, and a medium of exchange. The first function—money as a unit of account—does not by itself generate any demand for money, because one can quote prices in dollars without holding any. By contrast, money can serve its other two functions only if people hold it. Theories of money demand emphasize the role of money either as a store of value or as a medium of exchange General money demand function ( M / P ) d = L ( i, Y ) reveal that two fundamental factors that affect money demand are interest rate and income. In each models, the two factors will be identified concretely
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I Portfolio theories of money demand Theories of money demand that emphasize the role of money as a store of value are called portfolio theories. According to these theories, people hold money as part of their portfolio of assets. The key insight is that money offers a different combination of risk and return than other assets. In particular, money offers a safe (nominal) return, whereas the prices of stocks and bonds may rise or fall. Thus, some economists have suggested that households choose to hold money as part of their optimal portfolio
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