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Econ2013Chapter11 - Chapter 11 Money Demand the Equilibrium...

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Chapter 11 Money Demand the Equilibrium Interest Rate and Monetary Policy o Monetary Policy- behavior of the Feed concerning money supply o Interest- the fee that borrowers pay to lenders for the use of their funds o Interest rate- annual interest payment on a loan expressed as a percentage of the loan The demand for Money o Interest rate and national income (Y) influence how much people want to hold o How much of your financial assets do you want to hold in the form of money o How much you want to hold in the interest-bearing securities, such as bonds o Income arrives once a month, spending is continuous The transaction Motive o Trade off in liquidity and interest income offered o Transaction motive – main reason people hold money is to buy things o Assumptions Only 2 kinds of assets are available Bonds/securities Money/ currency, deposits Income for H.H. is ‘bunched up’ and arrives once a month at the beginning of the month Spending is spread over time
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