Chapter 05 - Supplement

Chapter 05 - Supplement - i 2 , there is still excess...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 05 - Supplement 1 i P B B M Bd3 Ms Bs Md i Bd1 i 1 i* i 1 i* P B* P B1 B* M 1 M* XS B1 XD M1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Chapter 05 - Supplement 2 At the initial interest rate i 1 , there is an excess demand for money ( XD M1 in which people want to hold more money than they currently have). The relationship between the bonds market and the money market is that BS+MS=BD+MD such that B S -B D =M D -M S ( XS B1 =XD M1 ). To try to obtain more money, they will sell their only other asset ( bonds ) shifting the demand for bonds curve to the left ( Bd1 to Bd2 ), which puts downward pressure on price ( P B1 to P B2 ) and interest rate rises to i 2 . The quantity demand for money decreases ( M 1 to M 2 ) as the opportunity cost for holding money rises .
Background image of page 2
Chapter 05 - Supplement 3 At higher interest rate
Background image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: i 2 , there is still excess demand for money ( XS B2 =XD M2 ) and people continue to sell bonds ( Bd2 to Bd3 ) putting further downward pressure on bond price and raising interest rate to a higher level. Until the bond price has fallen to P B* and interest rate has risen to i* such that the opportunity cost of holding money is high enough to reduce quantity demand for money to M* , then there will be no more excess demand for money in the money market (the money market is in equilibrium ). According to Walras Law , the bonds market is also in equilibrium ( B S +M S =B D +M D and MS=MD implies BS=BD )....
View Full Document

Page1 / 3

Chapter 05 - Supplement - i 2 , there is still excess...

This preview shows document pages 1 - 3. Sign up to view the full document.

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