is-lm - Keynesian IS-LM Keynesian The Keynesian System(II...

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Keynesian IS-LM Keynesian IS-LM The Keynesian System (II): Money, Interest, and Income
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2 Problems with the Problems with the Income-Expenditure Model Income-Expenditure Model What about prices? Don’t they change when AS and AD conditions change? Don’t they have an influence? Are firms really indifferent to changes in the real wage rate? These issues remain to be addressed. ..
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3 Money in the Keynesian Model Money in the Keynesian Model Recall the classical model: Transactions motive : people hold money only to make transactions Rejects the store of value theory of the mercantilists, arguing that: Money bears no interest, and A rational person would not forego a positive return by holding money unless he/she planned to make a transaction. People do not hoard money .
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4 Liquidity Preference Theory Liquidity Preference Theory Money is: 1. A Medium of Exchange 2. A Store of Value 3. A Unit of Account The first two create demands for money.
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5 Liquidity Preference Theory Liquidity Preference Theory Transactions Motive—yields transactions demand for money Store of Value—yields: Precautionary Motive—yielding precautionary demand for money Speculative Motive—yielding the speculative demand for money There are reasons why someone might There are reasons why someone might rationally hoard money! rationally hoard money!
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6 Speculative Demand (1) Speculative Demand (1) Keynes considers a portfolio of financial assets. All financial assets can be considered as money or bonds: Money (M): yields no return Bonds (B): yield a return Wh = M + B
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7 Speculative Demand (2) Speculative Demand (2) Example—Perpetuity (a bond that never matures): Bond is issued at $1000 Coupon rate is $50
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is-lm - Keynesian IS-LM Keynesian The Keynesian System(II...

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