lec20 - Money Supply and Demand determines Interest Rate...

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1 Money! 3 Money Supply and Demand determines Interest Rate Monetary Policy: Government manipulating supply of money to affect interest rate. 7 What is money? Choice: Hold funds yourself so you can use them whenever you want. “Liquid assests” = Money Give funds to someone else for them to use for a period of time. “Non-liquid assets” Interest rate: Amount that person receives for allowing another person to use his/her assets for a period of time. 11 Today distinction is less clear: Interest is paid on fully liquid funds. There is a continuum of liquidity. Interest rate is higher for less liquid funds. Consider the “interest rate” to be the premium received for lower liquidity. 13 Why do people hold money? Transactions Speculation 14 Demand Curve for Money Quantity of money demanded depends on interest rate. r M M d
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15 Shifts in Demand Curve for Money Y rises M d rises. r M M d 1 M d 1 16 Prices rises M d rises.
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This note was uploaded on 04/03/2008 for the course ECON 1 taught by Professor Martholney during the Fall '08 term at University of California, Berkeley.

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lec20 - Money Supply and Demand determines Interest Rate...

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