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notes 7 - EC202 Fall 09 Lecture Notes 7 Gabriele Gratton...

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Lecture Notes 7 Gabriele Gratton November 1, 2009 1 In the ±rst part of the course we have already discussed about the role of money in our economy. To summarize, individuals were holding money for the sole purpose of having cash for transactions. Individuals, said otherwise, do not want to hold money, they have it in their hands as much as needed to buy what they need in that period. When it comes to savings, individuals only hold bonds or shares and get some real interest rate (out of the nominal rate r and the in²ation rate ± ). Keynes has a complete di/erent perspective on this: individuals hold money not solely for the purpose of ±nancing current transaction, but as well as an alternative to bonds and shares as a mean of store of value in time. In other words, they really want money. A question comes quite naturally: if bonds pay some positive interest rate , why should anybody want to hold money? Money has indeed no return in time if not for the change in prices. In order to explain his point, Keynes uses the concept of expectations. As you will see the process with which individuals form their expectations in Keynes is relatively naif, but the idea itself ³ at the time ³ was nonetheless a great innovation and its development would have deeply changed macroeconomics in the following 50 years. 2
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This note was uploaded on 01/28/2010 for the course EC CASEC202 taught by Professor Graton during the Spring '10 term at BU.

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notes 7 - EC202 Fall 09 Lecture Notes 7 Gabriele Gratton...

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