ECON 345 Chapter 3: Study guide - Chapter 3 - Money, Interest Rate, and Exchange Rates

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16 May 2011
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What is money: money supply monetary aggregate the fed reserve calls m1 total amt of currency + checking deposits held by households + firms. How the money supply is determined: controlled by central bank. Expected return: currency pays no interest opportunity cost when holding money, other things equal, ppl prefer assets offering higher expected returns a rise in interest rate causes demand for money to fall. Risk: risk is not important in money demand, any change in riskiness of money = change in riskiness of bonds. Liquidity: main benefit of holding money, rise in avg value of transactions carried out by a household or firm causes its demand for money to rise. Aggregate money demand: the total demand for money by all households + firms in economy sum of all economy"s individual money demands. Interest rate rise in interest rate = reduce aggregate money demand.

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