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march 4 - Motives transaction demand for money Transaction...

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1. Quantity Equation 2. FED & MP 3. D for M a. Motives b. Factors/Determ- 4. M Mkt Equil 5. MP: Chain Reaction 6. Critique 7. Big Ones Quantity equation MV = Py: (Q of M) Velocity = Y V = Y/M, MV = Y = py Self-defeating proposition = specie flow mechanism – Spain has gold but has to give up for cheap goods of France Monetary policy: Money multiplier (M) = 1/R x H Open Market Operations (OMO) – ex. Buying treasury bill from bank of America to increase M FOMC – Federal Open Market Committee Discount Rate – ex. Lowering the discount rate encourage the borrowing of money therefore the money supply Changing R – change the size of the multiplier and therefore change the amount of money in the economy Demand for Money – holding money Why do people want to hold on to money? – liquidity Ex. Picasso painting has value but it is not easy to sell and get what you want
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Unformatted text preview: Motives: transaction demand for money Transaction motive – ex. Holding money for planned transaction Precautionary Motive – ex. Holding money for non-planned transactions Speculative Motive – ex. Holding money for good business opportunities Asset Looking for returns, risk, liquid Stocks 1 3 2 Bonds 2 2 2 Money 3 1 1 Risk (treasury bill for bonds somewhat managed by the gov) Money is #1 in two categories; therefore, it is the best financial asset What are the things that affect assets 1. Income 2. Interest rate r L(Y1) L(Y0) M Monetary Policy Demand for Investment Cost of investment – interest rate Money supply increase, interest rate goes down, investment goes up, GDP (Y)...
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