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ECON 1020 (99)
Lecture 76

ECON 1020 Lecture 76: Lecture 76

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University of Manitoba
ECON 1020
Ryan A.Compton

o982 CHAPTER 13 Interest Rates and Monetary Policy The Market for Money and the Determination of Interest Rates: The Demand for Money (two components): FIGURE 131 o 1. Transactions Demand (Dt) Demand for money as a medium of exchange (to participate in transactions) Varies directly with GDP People with more income, have higher transactions demand Ex: Bill Gates has higher income than Compton, therefore higher transactions demand Transaction demand curve is vertical Doesnt depend on the interest rates Depends on incomeGDP 2. Asset Demand (Da) Demand for money as a store of value Varies inversely with the interest rate As interest rate increases, we want to hold less money, and vise versa Asset demand curve is downward sloping Depends on interest rates o Total Demand for money, Dm and supply Money supply curve is vertical Money supply does not depend on interest rate (at equilibrium point) If bank increases interest rates, it decreases money supply in economy If bank decreases interest rates, it increases money supply in economy Equilibrium Interest Rate: Money market: the market in which demand and supply of money determine the interest rate in the economy o Where money supply and money demand intersect Interest Rates and Bond Prices: How does the money market reach equilibrium? Inverse relationship between bond prices and interest rates
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