ECO209Y1 Lecture Notes - Lecture 5: Memory Stick, Budget Constraint, Shortage
Document Summary
Something you owe, will have to repay in future. Will only consider money and interest bearing assets (bonds) Since money market and bond market are related, can just focus on money market. There is certain amount of money that maximizes utility. Nominal demand expressed in terms of current dollars. Real demand represents purchasing power, in terms of base period prices. Real demand = nominal demand / price level. Real demand for money also called real balances. Real wealth budget constraint = w = l + db. Indicates that demand for real balances plus demand for real bond holdings must add up to real financial wealth. Real financial wealth must equal supply of financial assets. M is nominal money stock, sb is real stock of bonds. In equilibrium, l + db = m/p + sb (l-m/p) + (db - sb) = 0. Eco209 page 1 (l-m/p) + (db - sb) = 0.
