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Lecture 6

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Economics (Arts)
ECON 460
William Watson

Lecture 6 ECON 460 Tuesday, September 25, 2012 Chapter 13: The General Theory of the Rate of Interest I What determines r? What does classical theory say?  R equilibrates real investment and real saving; if they differ r adjusts; Keynes said this isn’t correct and have to look at money market II Time-preference has two parts. What are they?  Decide whether to save or spend  Decide which form of saving- how liquid will it be (Is “liquidity-preference” really a part of time-preference? Or is it a decision made following a decision about time-preference?) “Obvious” r is not the return to saving. Why?  Because you can save without getting a return; r equates money stock with liquidity preference: M = L(r) ( “This is where, and how, the quantity of money enters into the economic scheme.) If r is positive, why ever hold money? What is the relationship between r and bond prices? What are “bears” and “bulls”? What are the transactions (T), precautionary (P) and speculative (S) motives for holding money? T: people demand money to engage in transactions With an organiz
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