ec-6 - Chapter 17 How The Money Supply Affects AD/AS Model...

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How The Money Supply Affects AD/AS Model Chapter 17
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What’s So Special About Money? Demand For Money Effects of a Change in the Money Supply on AD/AS Open Economy Effect of Monetary Policy Monetary Policy and Inflation: Monetarism Fed Target Choices: Interest Rates or Money Supply ? Chapter Outline
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Anything that affects the amount of money in existence is going to affect all markets Holding money To use money, one must hold money, If people desire to hold money, there is a demand for money What’s So Special About Money?
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The demand for money: the amount of money people wish to hold Transactions demand Precautionary demand Asset demand Demand For Money
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Transactions Demand Holding money as a medium of exchange to make payments The level varies directly with nominal national income Demand For Money
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Precautionary Demand Holding money to meet unplanned expenditures and emergencies The level varies with the interest rate Demand For Money
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Asset Demand Holding money as a store of value instead of other assets The level varies with the interest rate Demand For Money
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Demand For Money: Money Demand Curve Quantity of Money Interest Rate M d • When the interest rate rises the opportunity cost of holding money increases and the quantity of money demanded falls • The location of M d is determined by the level of income Q md1 B r 2 A r 1 Q md2
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When the money supply increases people have too much money How can this be? Have you ever had too much money? Effects of a Change in the Money Supply on AD/AS
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Effects of a Change in the Money Supply on AD/AS Direct Effect Jimmy’s plan is based on the direct effect of an increase in the money supply People buy goods and services to get rid of the surplus of money Aggregate demand increases
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ec-6 - Chapter 17 How The Money Supply Affects AD/AS Model...

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