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Cobbe ECO 2013 Fall 03 Chapter 13 p. 1 of 9 < 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 < 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.
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