Chapter_14 - Chapter 14: Money, Interest Rate, and Exchange...

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Chapter 14: Money, Interest Rate, and Exchange Rate Money Defined: A Brief Review How the Money Supply Is Determined Money supply: Currency circulation + Demand deposit. A country’s money supply is determined by its central bank, i.e., we take money supply as given. Graphically, R M/P MS/P Aggregate Money Demand Aggregate money demand: the total demand for money by all households and firms in the economy. Three factors affect/determine aggregate money demand: 1) The (nominal) interest rate, R: 2) The price level, P: 3) Real national income, Y: ECMC61 – Chapter 14 1
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In notation form, aggregate money demand can be expressed as: ( 29 ( 29 ) ( ), ( d Y R, L P M + - + × = Usually, we express money demand in real terms: ( 29 Y R, L P M d = Diagram. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Equilibrium in the Money Market Money market is in equilibrium when (real) money demand = (real) money supply: ( 29 Y R, L P MS = Given the price level (P) and real output (Y), the nominal interest rate (R) adjusts to equate real money demand to real money supply.
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This note was uploaded on 02/05/2011 for the course ECM 61 taught by Professor Jackparkinson during the Summer '10 term at University of Toronto- Toronto.

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Chapter_14 - Chapter 14: Money, Interest Rate, and Exchange...

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