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Lecture

ECO209 - OCT 22.docx

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Department
Economics
Course
ECO209Y1
Professor
All Professors
Semester
Fall

Description
ECO209 – OCT 22 Slide 19 • WN = NDM + NDB o Nominal demand for money/bond Cost Benefit of Holding Money • Return of bond (interest rate) is the opportunity cost of holding money • illiquid costs Real and Nominal Demand for Money • real demand for money: nominal demand divided by the price level • real money demand = “real balances” Asset Market Equilibrium • real supply of money: M/P • bonds is only limited to gov’t bonds o total supply = outstanding bonds circulating in demand o every time there is a deficit, bonds are issued • equilibrium: real demand of assets = real supply of assets What is the rate of interest? • Perpetual bond o Bond with no maturity date o Will always pay interest • Face value vs market price Determination of the Rate of Interest • Yield of the bond represents the opportu
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