ECON206 Lecture 8: Econ 206 Lecture 8

• School: University of Waterloo
• Department: Economics
• Course: ECON206
• Professor: Vaughan,Maryann

Document Summary

Bs bd = md - ms: if md = ms and the rhs = 0, then bs = bd and lhs = 0. Shifts in the supply of money: assume that the supply of money is controlled by the central bank, an increase in the money supply engineered by the bank of. Canada will shift the supply curve for money to the right: the money supply is therefore perfectly inelastic. Adjustments to equilibrium in the money market: fig. 5-8, pg. 107, ms > md, excess supply of money at that interest rate. Bond price will increase and the interest rate will fall: md > mss, excess demand for money at that interest rate. Bond price will decrease and the interest rate will increase. Money supply and interest rates: liquidity preference suggests increase in ms -> decrease in i i1 s. Criticism: are there important factors left out of this analysis, friedman suggest the liquidity preference result is correct, called the liquidity effect.