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Lecture 16 - 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 he yield of the bond is the rate of interest in e ¾ The yield of the bond is the rate of interest ( i ) in the economy ± The opportunity cost of holding is the interest forgone ( i ) by not holding instead © Gustavo Indart Slide 2
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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) t r f l © 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 T e de a d o o ey s a ct o o t e , GDP , and the price level ¾ M D = M D (i, Y, P) ± The interest rate –i ¾ The demand for money is negatively related to i ± Real GDP –Y ¾ The demand for money is positively related to the level of Y ± The price level –P ¾ The demand for money is positively related to P © Gustavo Indart
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