1454925697_53__KO8ch14.docx - KO8ch14 Now we study money specifically and bring it into the foreign exchange market Recall money functions as a medium

1454925697_53__KO8ch14.docx - KO8ch14 Now we study money...

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KO8ch14 Now we study money specifically and bring it into the foreign exchange market. Recall money functions as a medium of exchange, unit of account, store of value and means of deferred payment. In Nigeria we would define money as the total of currency in Naira notes. People demand money according to risk, liquidity and expected return just as is true of any other asset. For aggregate money demand, we have causal variables of interest rate, price level and income. Since real aggregate money demand depends on real national income, we could write it as m = f (y ). If the central bank sets the money supply, we might view it as a vertical curve. Equilibrium is merely M d = M s . Note figure 14-6 which relates the money market and the foreign exchange market. The foreign exchange market links $ and €, so it could also link £ and ¥ or and $ for that matter. A money market can show inflation if money supply is increased too rapidly by the central bank. Inflation can be pushed by excess demand for goods and workers’ services, expectations and raw materials’ prices. The foreign
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