ECON102 Lecture Notes - Lecture 27: Business Cycle, Liquidity Trap, Investment Goods
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17 Apr 2018
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Econ 102 lecture 27 the liquidity-preference model. Monetary policy primarily in uences the economy through changes in the interest rate. As a result, changes in the interest rate a ect the appeal of borrowing and lending, which can have signi cant impacts on the economy. The liquidity-preference model refers to the idea that the quan2ty of money people want to hold is a func2on of the interest rate. In other words, the model represents the willingness people have to hold liquid assets vs. interest bearing assets (from chapter 14. pptx , slide 17) This means the money demand curve slopes downward. The bank of canada sets the money supply (q*), which means the money supply curve is set by monetary policy. The higher the interest rate, the less cash people want to hold. This is because the opportunity cost has gone down. Or in other words people will get more money back if they hold less cash assets.