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Western University
Economics 2152A/B
Ayoub Yousefi

Chapter 7 The Asset Market, Money and Price Level The Demand for Money + + - relationship to nominal money M = P L(Y,i) (equation 1) d M : nominal money P: Price level i = 0 (interest rate on money) i: nominal rate of interest on non-monetary assets, when i changes movement along a given money demand curve Y: real GDP (real income) However change in other factors will cause a shift in money demand curve: - Increase in the riskiness in the economy  Demand for money rises, curve shifts to the right - Increase in liquidity of other assets  Demand for money declines, curve shifts to the left Alternative expression for demand for money (equation 2): d M /P = L (Y,i)demand for real money function M /P = L (Y, r+ π ) or this equation works too e If π (expected rate of inflation goes up) demand for money goes down Elasticity of money demand d - With respect to income %∆ M / %∆ Y, positive and less than 1 almost 2/3 d - With respect to nominal rate of interest, %∆ M /%∆ i, negative and small Velocity of Money and Qu
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