ch133 - CHAPTER CHECKLIST <When you have completed your...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Cobbe ECO 2013 Fall 03 Chapter 13 p. 1 of 17 < When you have completed your study of this chapter, you will be able to C H A P T E R C H E C K L I S T Explain what determines the demand for money and how the demand for money and the supply of money determine the nominal interest rate. 1 Explain how in the long run, the quantity of money determines the price level and money growth brings inflation. 2 Identify the costs of inflation and the benefits of a stable value of money. 3 < The Real Economy Real factors that are independent of the price level determine real GDP , and thus the natural unemployment rate. Investment and saving determine the real interest rate and, along with population growth and technological change, determine the growth rate of real GDP. < The Money Economy Money is created by banks and its quantity is ‘controlled’ by the Fed. WHERE WE ARE; WHERE WE’RE HEADING
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Cobbe ECO 2013 Fall 03 Chapter 13 p. 2 of 17 < The Money Economy The effects of money can be best understood in three steps: The effects of the Fed’s actions on the short-term nominal interest rate The long-run effects of the Fed’s actions on the price level and the inflation rate The details of the interactions between the short- run and long-run effects WHERE WE ARE; WHERE WE’RE HEADING 13.1 MONEY AND THE INTEREST RATE < The Demand for Money Quantity of money demanded How much money households and firms choose to hold. Benefit of Holding Money One benefit of holding money is the ability to make payments easily and quickly. The more money you hold, the easier it is for you to make payments. Money Demand < Jargon: ‘Demand for Money’ refers not to how badly you want to be rich, but: < ‘How much of your existing wealth do you want to hold in the particular form, money , recognizing that money is just one of a large range of assets you can and do hold wealth in.’ < So the key to understanding the demand for money, the desire to hold wealth as money rather than stocks, bonds, cars, or peanut butter, is to consider the advantages of money compared to alternatives, and the opportunity cost of holding money compared to alternatives.
Background image of page 2
Cobbe ECO 2013 Fall 03 Chapter 13 p. 3 of 17 Demand for Money < The key advantage of money is that it is liquid – you can make payments with it. < The next best alternative to money is thus the next most liquid asset – such as securities, bonds, or savings accounts. < Their advantage compared to money is that you earn some income by holding them, because they earn interest, whereas money proper itself does not earn interest. 13.1 MONEY AND THE INTEREST RATE The marginal benefit of holding money decreases as the quantity of money held increases. Opportunity Cost of Holding Money
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 17

ch133 - CHAPTER CHECKLIST &lt;When you have completed your...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online