is-lm - Keynesian IS-LM Keynesian The Keynesian System(II...

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Keynesian IS Keynesian IS - - LM LM The Keynesian System (II): Money, Interest, and Income
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2 Problems with the Problems with the Income Income - - Expenditure Model Expenditure Model ! What about prices? Don’t they change when AS and AD conditions change? Don’t they have an influence? ! Are firms really indifferent to changes in the real wage rate? ! These issues remain to be addressed...
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3 Money in the Keynesian Model Money in the Keynesian Model ! Recall the classical model: Transactions motive : people hold money only to make transactions Rejects the store of value theory of the mercantilists, arguing that: Money bears no interest, and A rational person would not forego a positive return by holding money unless he/she planned to make a transaction. People do not hoard money .
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4 Liquidity Preference Theory Liquidity Preference Theory ! Money is: 1. A Medium of Exchange 2. A Store of Value 3. A Unit of Account ! The first two create demands for money.
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5 Liquidity Preference Theory Liquidity Preference Theory ! Transactions Motive—yields transactions demand for money ! Store of Value—yields: Precautionary Motive—yielding precautionary demand for money Speculative Motive—yielding the speculative demand for money ! There are reasons why someone might There are reasons why someone might rationally hoard money! rationally hoard money!
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6 Speculative Demand (1) Speculative Demand (1) ! Keynes considers a portfolio of financial assets. ! All financial assets can be considered as money or bonds: Money (M): yields no return Bonds (B): yield a return !
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