chapter-4 - CHAPTER-4: THE DEMAND FOR MONEY Money functions...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER-4: THE DEMAND FOR MONEY - Money functions as a medium of exchange, unit of account and store of value. - There are different definitions of money: o M1: Currency in exchange + Checkable Deposits (equaled around 14% of the GDP in 1997) o M2: M1 + Small Denomination Time Deposits + Money Market Mutual Funds (<$50,000) + Repurchase Agreements (equaled around 50% of the GDP in 1997) - Money does not earn interest. Why do people hold some of their assets in the form of money given that there exists interest bearing assets? - The answer to the above question is provided by the convenience money provides in terms of lowering the transaction costs. - Households weigh the benefit of holding money against the interest foregone by keeping some of the assets in a form that does not generate interest income. OPTIMAL CASH MANAGEMENT - Let P.c be the total consumption spending of the household during a year. -
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 3

chapter-4 - CHAPTER-4: THE DEMAND FOR MONEY Money functions...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online