Macro 2. Tutorial 6.pptx - TUTORIAL 6 EIA2002...

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TUTORIAL 6EIA2002 Macroeconomics ANG SHU XIANEIA170015GOH HUI SANEIA170038NG YI CHING EIA170113PANG JING XIAN EIA170152WEE CHEAN LOO EIA170213
1. What is the most important difference between the Classical and Keynesian theories of money demand? The most important difference between Classical and Keynesian theories of money demand is interest rate as determinant.
Classical EconomicsCambridge approach Md=kPYk= proportional of real income people wish to hold money.In Classical Economics, Md depend on income. As income increase, Md also will increase. Equation of ExchangeM(1/k)=PY same as MV=PYTherefore, (1/k)=V. This means that, the proportional income people wish to hold as money is the same as the number of time average dollar is used in income transaction.
Keynesian EconomicsTotal Demand of Money (Transaction+Precautionary+Speculative)Md= f(Y,r) Y+, r-Md= c0+c1Y-c2rIn Keynesian Economics, money demand positively depend on income and negatively depend on interest rate. Md will increase if Y increase and a decrease in r. Speculative Motive (Liquidity Preference)Liquidity Preference- Keynes’s term demand for money relative to bond.Positively depend on Y and negatively depend on r. An decrease in r (bond pay lower), public will no longer holding
2. Explain how the following changes would affect the amount of money an individual demand based on the inventory-Theoretic approach on the transaction demand for money
Baumol Tobin (Inventory-Theoretic of Money Demand)Transaction of demand money as inventory of the medium of exchange by individual or firm.Md= Y (+)= incomeN (-)= number of trip consumer make to bank to withdraw money from saving account.F (+)=cost of a trip to the bank/brokerage feesi (-) = interest rate on saving account
An increase in interest paid on bonds i(-)Money demand negatively depend on interest rate.An increase in interest paid on bonds will make money demand decrease. Higher interest rate indicates a higher return when holding bond.Thus, the opportunity cost of holding money will increase.People are not wish to hold money as cash because now bond will earn more.
An increase in brokerage fee for bond market transaction F(+)Money demand positively depend on brokerage fees .An increase in brokerage fees for bonds will make money demand increase. Higher brokerage fees means that the cost of holding bond increases.Thus, the opportunity cost of holding money will decrease.People are now relatively earn less on bonds. So, people tend to hold more money.
An increase in income Y(+)Money demand positively depend on income .

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