ECON2420 Lecture Notes - Lecture 2: Open Market Operation, United States Treasury Security, Money Supply
Document Summary
The equilibrium relation is called lm relation, where l stands for liquidity and m for money. Money supply is independent of interest rate, so it has a vertical curve since it is decided by the central bank. At any interest rate above equilibrium, there is excess supply of money. At any interest rate below equilibrium, there is excess demand of money. (i) rate (i) Initial equilibrium is at point a: equilibrium moves from a to a" and i to i". The effects of an in nominal income () on interest: in nominal income from to ", the level of transactions, which the md at any interest rate. This implies that an in () leads to an in (i). The effects of an in money supply () on interest rate: an in ms, leads to a shift of the ms curve to the right. This implies that an in ms by the central bank leads to a.
