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MacroEcon Chapter 14

MacroEcon Chapter 14 - Chapter 14 Money Market and Monetary...

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Chapter 14: Money Market and Monetary Policy Monetary policy: tools Fed use to influence macroeconomics Most common: change in interest rates (control through money supply) I. Demand for Money economic decision maker: sacrifice one thing for another demand for $: how much $ people would like to hold, given constraints they face A. Household Demand for $ $- one way to hold wealth hold more wealth in $, hold less in other forms savings account, stocks, bond individuals wealth constraint: is determined by given wealth and how a person must give up one wealth in order to acquire more of another (at any point in time, total wealth is fixed) A households quantity of money demanded is the amount of wealth that the household chooses to hold as money, rather than as assets money= means of payment (upside to $) pays little in interest or none at all when you hold money, you bear an opportunity cost- the interest you could have earned by holding other assets easier to buy things Households choose how to divide wealth between two assets: 1) money which can be used as a means of payment but earns no interest; and 2) bonds, which can earn interest, but cannot be used as a means of payment more we hold $, less go through inconvenience of changing bond to $ 3 key variables have impact on us (individuals): price level: greater # of money spent, more money you will need at hand; increase in price level raises $ cost of purchases
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real income: price level remains unchanged, but income increases spend more interest rate: what you give up when you hold $ the opportunity cost of $; greater interest rate, greater the opportunity cost rise in interest rate decreases quantity of $ demanded B. Demand for $ by business businesses face same types of consumers as individuals (3 types) have only certain amount of $ C. Economy: wide demand for $ quantity of money demanded (w/o any qualified) total demand for money by all wealth holders in economy total wealth in 2 forms: money or bond Economy wide quantity of money demanded is the amount total wealth in the economy that all households and businesses, together choose to hold as money rather than as bonds. demand for $ in economy depends on: rise in level will increase the demand for money rise in real income (real GDP) increase demand for money rise in interest rate decrease quantity of money demanded D. Money demand curve money demand curve: curve indicating how much $ money will be demanded at each interest rate total quantity of money demanded at each interest rate
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curve: downward slope drop in interest rate – lower opportunity cost of holding $ increase quantity of money demanded I) Shifts in Money Demand Curve anything other than interest rate- shifts curves ex: real income increases: shift rightward a change in the interest rate moves us along the money demand curve. A change in money demand caused by something other than the interest rate (such as real income or the price level) will cause the curve to shift.
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