ECO101H1 Study Guide - Liquidity Preference, Price Level, Interest Rate
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ECO101H1 Full Course Notes
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Assets market: money does not pay any return, bonds pay a return. The yield of the bond is the rate of interest (i) in the economy. Present value (pv): value now of one or more payments or receipts made in the future; often referred to as discounted present value. The opportunity cost of holding money is the interest forgone (i) by not holding bonds instead. Expectations about returns on other assets (bonds) Interest rate (i): demand for money is negatively related to i. Real gdp (y): demand for money is positively related to the level of y. Price level (p): demand for money is positively related to p. we"ll assume however, p is fixed. The curve depicting the demand for money as a function of the rate of interest is called the liquidity preference curve. Assuming y and p are constant, the demand for money is a decreasing function of the rate of interest.