Chapter 15 Theory of Liquidity Preference

Chapter 15 Theory of Liquidity Preference - 15­1 1The...

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Unformatted text preview: 15­1 1The Theory of Liquidity Preference Diagram 1: The Money Supply Diagram 2: The Money Demand Curve 1Diagram 1: The Money Supply Money Supply 15­2 Interest Rate Quantity of Money Fixed by the Bank of Canada Quantity of Money 15­3 Diagram 2: The Money Demand Curve 15­4 Interest Rate Money Demand Quantity of Money 15­5 Diagram 3 15­6 To summarize Diagrams 2 and 3: Diagram 3: An Increase in the Level of Transactions Interest Rate 15­7 r1 Money Demand 15­8 0 Quantity of Money Diagram 4: Equilibrium in the Money Market o 15­9 The money market will be in equilibrium when the demand for money equals the supply of money Diagram 5: An Increase in the Money Supply o Suppose that the Bank of Canada decides to increase the nominal money supply from MS0 to MS1 o The vertical money supply line will shift to the right and the equilibrium interest rate will decline from r0 (at point E0) to r1 (at point E1) Diagram 4: Equilibrium in the Money Market 15­10 r1 r* r2 15­11 0 Diagram 5: An Increase in the Money Supply Interest Rate MS0 15­12 E0 Money Demand 15­13 0 Quantity of Money ...
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This note was uploaded on 10/21/2010 for the course ECON 102 taught by Professor ? during the Fall '08 term at Waterloo.

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Chapter 15 Theory of Liquidity Preference - 15­1 1The...

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