Demand for Money Notes - 11/21 The Demand for Money...

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11/21 The Demand for Money Definition: The amount of money that households and firms choose to hold given their income, interest rates, etc. Is the quantity demanded of money - In general, the quantity of money demanded is: - A positive function of the level of real income or wealth - A positive function of the price level - A negative function of the opportunity cost of holding money - A positive function of the degree of economic and financial uncertainty - Affected by financial technology , which is determined by financial innovation and regulation/deregulation The Opportunity Cost of Holding Money Some types of money earn no return-for example, currency and some demand deposits. The own-rates of return on most types of money typically - do not adjust when other interest rates change (ex: currency) - Or, more commonly, adjust slowly (ex: savings deposits) For simplicity, we will typically assume that money does not earn an explicit rate of return
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