12 The IS-LM Model, Part 2 - 1 13-1 The IS LM Model, Part 2...

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Unformatted text preview: 1 13-1 The IS LM Model, Part 2 13-2 Agenda The Demand for Money Asset Market Equilibrium The LM Curve 13-3 The Demand for Money The demand for money is the quantity of money people want to hold in their portfolios. The demand for money depends on expected return, risk, and liquidity. Money is the most liquid asset. Money pays a low (or zero) return. Money-holding decisions depend on how much people value liquidity versus the low return on money. 13-4 The Demand for Money Macroeconomic variables that affect the aggregate demand for money: The price level, Real income, and Interest rates. 2 13-5 The Demand for Money The price level : The higher the price level, the more money needed for transactions. Nominal money demand rises proportionally as the price level rises. 13-6 The Demand for Money Real income : The higher real income, the higher is spending. The higher is spending, the more money needed for transactions. Real money demand rises less than proportionally as real income rises. 13-7 The Demand for Money Interest rates : The higher the interest rate, the higher the expected return on non-monetary assets. And the higher the opportunity cost of holding money. Nominal money demand declines as the interest rate (or return on non-monetary assets) increases. People trade off less liquidity for a higher return. 13-8 The Demand for Money The demand for money function : M d = P * L ( Y , i ) M d is nominal (aggregate) demand for money, P is the price level, L is the demand for money function, Y is real income or output, and i is the nominal interest rate on non-money assets. 3 13-9 The Demand for Money The demand for money function: The nominal money demand is proportional to the price level. The real demand for money is positively related, but less than proportionally , to real income. The nominal demand for money is inversely related to nominal interest rates. 13-10 The Demand for Money The demand for money function : An alternative expression is: M d = P * L ( Y , r + e ) A rise in r or e reduces money demand....
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This note was uploaded on 09/27/2009 for the course ECON 100 taught by Professor Staff during the Spring '08 term at University of California, Berkeley.

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12 The IS-LM Model, Part 2 - 1 13-1 The IS LM Model, Part 2...

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