Lecture 10 - 1 10-1 The Asset Market, Money, and Prices,...

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Unformatted text preview: 1 10-1 The Asset Market, Money, and Prices, Part 2 10-2 Agenda Asset Market Equilibrium Money Growth and Inflation 10-3 Asset Market Equilibrium Asset market equilibrium : Assume that all assets can be grouped into two categories, money and non-monetary assets. Money ( M ) includes currency and checking accounts Pays interest rate i m (which we will assume is zero). Supply is fixed at M. Non-monetary assets ( NM ) include stocks, bonds, etc. Pays interest rate i = r + e Supply is fixed at NM. 10-4 Asset Market Equilibrium Asset market equilibrium: The nominal demand for assets: Let m d + nm d be an individuals nominal demand for assets, and Let M d + NM d is the aggregate nominal demand for assets. Which is also aggregate nominal wealth. 2 10-5 Asset Market Equilibrium Asset market equilibrium: The nominal supply of assets: Let M + NM be the aggregate nominal supply of assets. Which is also aggregate nominal wealth. Equilibrium in the asset market requires: ( M d M) + ( NM d NM) = 0 10-6 Asset Market Equilibrium Asset market equilibrium: Equilibrium in the asset market requires: ( M d M) + ( NM d NM) = 0 The excess demand for money ( M d M ) plus the excess demand for nonmonetary assets ( NM d NM ) must equal 0. 10-7 Asset Market Equilibrium Asset market equilibrium: If money supply equals money demand, ( M d = M ), then non-monetary asset supply MUST equal non- monetary asset demand, ( NM d = NM ). Consequently, when the money market is in equilibrium, the entire asset market is in equilibrium. 10-8 Asset Market Equilibrium Asset market equilibrium : M / P = L ( Y , r + e ) Real money supply = Real money demand M is determined by the central bank, e is fixed (for now), The labor market determines N; given N the production...
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Lecture 10 - 1 10-1 The Asset Market, Money, and Prices,...

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