Unformatted text preview: Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF Suppose the Federal Reserve perfectly controls the money
supply (money supply curve is vertical). So money demand depends negatively on interest rate. Chapter 4: the interest rate determines the opportunity cost
of holding (non-interest) bearing money. (OC = 1+i ) Keynes considers “money” as non-interest bearing. Money demand depends on wealth, expected real return
relative to other assets, risk and liquidity. Money is an asset, so the theory of asset demand applies. Money and Interest Rates Asset Demand ...
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