EC102-15SPRING09 - 15-11The Theory of Liquidity...

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Unformatted text preview: 15-11The Theory of Liquidity PreferenceDiagram 1: The Money SupplyDiagram 2: The Money Demand Curve15-21The Theory of Liquidity PreferenceoWe now turn to an analysis of the short-run effects of changes in the money supply on the interest rateDiagram 1: The Money SupplyoThe money supply is determined by the Bank of CanadaoThe money supply is a vertical lineDiagram 2: The Money Demand CurveoThe demand for money curve slopes down and to the right oAn increase in the interest rate causes people to demand (and hold) less money for transactions purposes15-3Diagram 1:The Money SupplyInterest RateMoney SupplyQuantity of MoneyQuantity of MoneyFixed by the Bank of Canada15-415-5Diagram 2:The Money Demand CurveInterest RateMoney DemandQuantity of Money15-615-7Diagram 3To summarize Diagrams 2 and 3:15-8Diagram 3:oAn increase in the level of transactions, caused by either an...
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EC102-15SPRING09 - 15-11The Theory of Liquidity...

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