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Lecture 37

Lecture 37-The Demand for Money

4 Pages
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Department
Economics
Course Code
ECO102H1
Professor
Jack Carr

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Thursday, March 11th, 2010
Interest Rate Determination (Short-Run)
Money Supply: Currency + bank deposits
Money Supply, Money Demand: determine interest rate
What are determinants of Money demand?
The Demand for Money: Intuition
Households hold two assets
Money (currency + bank deposits): pays no interest
Bonds: pay interest
You have: money $1,000
Bonds $10,000
Would you increase or reduce money holdings if:
(1) The interest rate rises from 5% to 10%?
(2) Your income rises, so you will be spending more on goods and services?
(3) Prices in the economy increase, so you will have to pay more for the same goods and
services you plan to purchase?
Demand for Money
Result Reason
Falls as interest rates 1. Money does not pay interest
increases 2. opportunity cost (interest forgone) of holding
money increases
Rises as real GDP increases real volume of transactions increases
Rises (proportionately) dollar volume of transactions increases
as price level increases
Symbol for interest rate
Lectures: r
Lipsey-Ragen: i
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Description
th Thursday, March 11 , 2010 Interest Rate Determination (Short-Run) Money Supply: Currency + bank deposits Money Supply, Money Demand: determine interest rate What are determinants of Money demand? The Demand for Money: Intuition Households hold two assets Money (currency + bank deposits): pays no interest Bonds: pay interest You have: money $1,000 Bonds $10,000 Would you increase or reduce money holdings if: (1) The interest rate rises from 5% to 10%? (2) Your income rises, so you will be spending more on goods and services? (3) Prices in the economy increase, so you will have to pay more for the same goods and services you plan to purchase? Demand for Money Result Reason Falls as interest rates 1. Money does not pay interest increases 2. opportunity cost (interest forgone) of holding money increases Rises as real GDP increases real volume of transactions increases Rises (proportionately) dollar volume of transactions increases as price level increases Symbol for interest rate Lectures: r Lipsey-Ragen: i www.notesolution.com
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