Lecture_Notes_14 - Money Interest and Inflation CHAPTER 14...

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Money, Interest, and Inflation CHAPTER 14
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14.1 MONEY AND THE INTEREST RATE The Demand for Money: Quantity of money demanded: The amount of money that households and firms choose to hold (for the purchase of goods and services – that is to make payments).
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14.1 MONEY AND THE INTEREST RATE Benefit of Holding Money: The benefit of holding money is the ability to make payments. The more money you hold, the easier it is for you to make payments. Opportunity Cost of holding Money: The opportunity cost of holding money is the nominal interest because it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.
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14.1 MONEY AND THE INTEREST RATE Opportunity Cost of holding Money: The opportunity cost of holding money is the interest rate forgone on an alternative asset. If you can earn 8 percent a year on a mutual fund account, then holding an additional $100 in money costs you $8 a year. The opportunity cost of holding $100 in money is the goods and services worth $8 that you must forgo. A fundamental principle of economics is that the higher the opportunity cost of holding money - the higher the interest income forgone by not holding other assets - the smaller is the quantity of money demanded.
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14.1 MONEY AND THE INTEREST RATE The Demand Curve for Money: The demand for money is the relationship between the quantity of money demanded and the nominal interest rate, when all other influences on the amount of money that people want to hold remain the same. Figure 14.1 on the next slide illustrate the demand for money.
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14.1 MONEY AND THE INTEREST RATE The lower the nominal interest rate—the opportunity cost of holding money—the greater is the quantity of real money demanded.
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1. Other things remaining the same, an increase in the nominal interest rate decreases the quantity of real money demanded. 2.
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Lecture_Notes_14 - Money Interest and Inflation CHAPTER 14...

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