Lecture16-ECO100 - Introduction to Introduction to...

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CO 100Y ECO 100Y troduction to Introduction to conomics Economics Lecture 16: he Demand for Money and The Demand for Money and Equilibrium in the Money Market © Gustavo Indart Slide 1
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ssets Market Assets Market ± Assumption: only 2 assets, money and bonds ± Money doesn’t pay any return ± Bonds pay a return ¾ The yield of the bond is the rate of interest in the economy ± The opportunity cost of holding money is the interest forgone by not holding bonds instead © Gustavo Indart Slide 2 gy g
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The Demand for Money ± Transaction motive o make regular payments ¾ To make regular payments ¾ Money as a medium of exchange ± Precautionary motive ¾ To make unexpected payments ¾ Money as a medium of exchange ± Speculative motive ¾ Expectations about returns on other assets (bonds) © Gustavo Indart Slide 3 ¾ Money as a store of value
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The Determinants of Money Demand ± The demand for money is a function of the rate of interest , real dth GDP , and the price level ¾ M D = M D (i, Y, P) he interest rate ± The interest rate ¾ The demand for money is negatively related to the interest rate ± Real GDP ¾ The demand for money is positively related to the level of real GDP ± The price level ¾ The demand for money is positively related to the price level © Gustavo Indart Slide 4 ¾ We will assume, however, that P is fixed
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This note was uploaded on 01/19/2010 for the course ECONOMICS ECO100 taught by Professor J.l.carr during the Fall '08 term at University of Toronto.

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Lecture16-ECO100 - Introduction to Introduction to...

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