Principle of Macroeconomics – Money and Inflation (Lecture 6.2)

Principle of Macroeconomics – Money and Inflation (Lecture 6.2)

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Principle of Macroeconomics – Money and Inflation (Lecture 6.2) The money market is the segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. The money market provides liquidity for the financial system. Demand for Money People hold money for transactions purposes (liquidity) and as a store of wealth (asset). The demand for money as an asset will depend on the interest rate. A lower interest rate will reduce the cost of holding money increasing the asset demand for money, a movement down along the MD curve. The transactions demand for money is determined by o the level of prices o the level of real national output (real GDP)
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Unformatted text preview: o the pace of financial innovation A change in these factors will shift the MD curve. Supply of Money The Reserve Bank determines the supply of money through its Open Market Operations (OMO). The RBA adjusts the money supply to achieve the rate of interest it requires. The nominal IR is the number of dollars that a borrower pays and a lander receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent. The real interest rate is the nominal interest rate adjusted to remove the effects of inflation on the buying power of money. Real interest rate = Nominal interest rate Inflation rate....
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Principle of Macroeconomics – Money and Inflation (Lecture 6.2)

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