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Unformatted text preview: 15 T HE D EMAND FOR M ONEY FOCUS OF THE CHAPTER • We all hold money either in currency, in our pockets, or as deposits in a bank. In studying the demand for money, we try to discover why people hold money, and what determines the amount of money they hold. • Our main goal is to find some function that tells us the amount of money people will hold for a known level of income and a known interest rate. You will recall, no doubt, that we need to know this to construct the LM curve. • Both theory and empirical evidence suggest that an increase in people’s incomes makes them want to hold more money, and that an increase in the interest rate makes them want to hold less. SECTION SUMMARIES 1. Components of the Money Stock Money consists of the stock of assets held as cash, checking accounts, and other, closely related assets, not generic wealth or income. There are four different measures of the money supply: M1 , M2 , M3 , and L . M1 consists of those assets that are the most liquid most easily used to pay for goods and services. L consists of those assets that are least liquid, but which can still be converted into a form acceptable to creditors. The components of each measure of money are listed below: M1 currency, demand deposits, travelers checks, and other checkable deposits M2 M1 plus shares in money market mutual funds, money market deposit accounts, savings deposits, and small time deposits 163 164 C HAPTER 15 M3 M2 plus repurchase agreements, Eurodollars, large time deposits, and institutional money market mutual fund holdings L M3 plus savings bonds, bankers acceptances, commercial paper, and short-term Treasury securities 2. The Functions of Money Money has traditionally been thought to have four functions: A medium of exchange . Money is used to pay for goods and services, and enables us to avoid the “double coincidence of wants” required in a barter economy. A store of value . Money retains its value over time; money we receive today can be stuck under our mattresses or placed in our checking account and used to purchase goods and services at a later date. A unit of account . Prices are quoted in dollars and cents rather than chickens, avocados, or visits to the dentist....
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- Spring '09
- Natural logarithm, M3 Half-track, M2 Browning machine gun, interest rates