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18-money demand - Money Demand Lecture 18-PREVIEW Dr...

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macroS2010 Lec18-page 1 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Money Demand Lecture 18-PREVIEW Dr. Jennifer P. Wissink ©2009 Jennifer P. Wissink, all rights reserved. March 31, 2010
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macroS2010 Lec18-page 2 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ Bonds: Face Value, r & $Pbond Face Value Stated Interest Rate $Pbond Market Interest Rate, r CONCLUSION: the $Pbond and r are inversely related. r $Pbonds and vice versa r $Pbonds and vice versa
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macroS2010 Lec18-page 3 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Transaction Motive for Money There is a trade-off between the liquidity of money and the interest income offered by other kinds of assets. The transaction motive is the main reason that people hold money—to buy things. inventory analysis synchronization problems Lots of interesting work on this. Pioneered by William Baumol(Princeton) and James Tobin(Yale) Get a money demand function: M D = f(interest rate, income, price level, other stuff) if r M D and if r M D if Y M D and if Y M D if PL M D and if PL M D
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macroS2010 Lec18-page 4 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Speculation Motive for Money Very Important: Recall there is an inverse relationship between the market value of interest-bearing bonds ($P B ) and the market interest rate (r). So... when interest rates are high, investors may wish to hold bonds (rather than money), with the hope of selling them when interest rates fall & bond prices rise (and vice versa). “What goes up, must come down” So… Supports the idea that: if r M D and if r M D
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macroS2010 Lec18-page 5 http://www.arts.cornell.edu/econ/wissink/econ102jpw/ The Money Demand Curve Hold Y & PL at some “exogenous” level and vary r.
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