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Lecture 8

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McGill University
Economics (Arts)
ECON 460
William Watson

Lecture 8 Tuesday, October 2, 2012 Chapter 17: The Essential Properties of Interest and Money I The rate of interest on money is the key limit on I and Y. Why?
 What is a commodity’s “own” rate of interest?
  People can maintain wealth in many forms  Money’s rate of return falls slowly than any other rate of return Why does the highest own-rate of interest determine all commodities’ own-rates of interest? Why is the money rate of interest often the highest? II
 How is the own-rate of interest determined by q, c, and l? (What are they?)  Q: yield, c: carrying cost, l: liquidity of asset  Liquidity is probably not great  Carrying costs of wheat can be high but price is unpredictable What are q, c and l for machines and houses? For money?  For money: high liquidity advantage- everyone takes it on demand; carrying costs are very low Total return = own-rate of interest = q – c + l Essential difference: For money, l > c; for other goods, c > l. “...that asset’s rate of interest which declines most slowly as the stock of assets in general increases ... eventually knocks out the profitable production of each of the others.” III Why would money’s own-return be “more reluctant to fall as output increases” than that of any other asset? How could you increase the carrying cost of money? How would time-stamped money help? In sum: Demand can go mainly to money; no more can be produced; and there isn’t a good substitute for it.  Invest in money- ME doesn’t come down quickly “Unemployment develops...because people want the moon...” (?) “There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e., a central bank) under public control...” IV Do money’s special properties come from its being “the standard in which debts and wages are usually fixed”? May help raise l. But what counts is l – c, so low c is key.
Money’s properties are what make wages sticky in it, not vice versa. ?? V World is so poor in accumulated capital-assets because of high liquidity-preference. (Was his world poor in accumulated capital-assets?) VI
 Natural rate of interest: keeps I and S equal. But there is a different such r for every level of output. Merely preserves the status quo.
 Neutral or optimum rate of interest is consistent with full employment. Chapter 18: The General Theory of Employment Re-Stated I Givens. Independent variables: Propensity to consume, MEC, and r. Dependent variables: Employment and national income. Three fundamental psychological factors: MPC, liquidity-preference, and expectation of future yield. (quaesitum: [L.] that which is sought for; an object of search; the answer to a problem) Division arbitrary: Focus on what determines variables of most interest to us, as well as on those that can be controlled. II I will proceed until MEC = r. That will cause a rise in Y and N. These in turn will cause a change in liquidity-preference (as demand for money rises because of i. change in output, ii. rise in wage-unit and iii. rising cost because of declining MPL. “...extreme complexity of actual course of events...” III System is not violently unstable. (Even in 1936?) Full employment a
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