Additional_Money_Market-1

Additional_Money_Market-1 - • The nominal interest rate...

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1 The Money Market Objective: illustrate the demand and supply for money and how they determine the nominal interest rate.
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2 The demand for money by the public is determined by: The price level The level of real income The nominal interest rate Money demand is represented by the following relationship: M D = PL(Y, i) M D = Money Demand, P = Price Level, Y = Real GDP, i = Nominal Interest Rate
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3 Price Level: Money demand is proportional to the price level. If the price level doubles, so too does money demand Real Income: The motive for holding money is due to its medium of exchange function People hold it because they wish to buy goods and services. If real income rises, people will plan to buy more goods and services, and so they will hold more money.
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4 Nominal Interest Rate:
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Unformatted text preview: • The nominal interest rate is the opportunity cost of holding money. • Assume for simplicity that money pays no interest. • Public could hold bonds rather than money. • By holding money, the public gives up the interest it could earn by holding bonds. • If the bond yield rises, the foregone interest of holding money rises, and the quantity of money demanded falls. 5 Money Nominal Interest Rate Money Demand Money Supply Equilibrium Interest Rate 6 Money Nominal Interest Rate Money Demand Money Supply Excess Supply Excess Demand 7 Money Nominal Interest Rate Money Demand Money Supply The Effect of an Increase in the Money Supply 8 Money Nominal Interest Rate Money Demand Money Supply The Effect of a Shift in Money Demand...
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This note was uploaded on 04/04/2008 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Additional_Money_Market-1 - • The nominal interest rate...

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