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ECO102H1 (155)
Jack Carr (32)
Lecture 37

Lecture 37-The Demand for Money

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Jack Carr

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
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