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1、2 of 36,The Demand for Money,The Fed (short for Federal Reserve Bank) is the U.S. central bank. Money, which can be used for transactions, pays no interest. There are two types of money: currency and checkable deposits. Bonds, pay a positive interest rate, i, but they cannot be used for transactions
2、.,4-1,3 of 36,The Demand for Money,The proportions of money and bonds you wish to hold depend mainly on two variables: Your level of transactions The interest rate on bonds Money market funds pool together the funds of many people and use these funds to buy bonds typically, government bonds.,4 of 36
3、,Income is what you earn from working plus what you receive in interest and dividends. It is a flowthat is, it is expressed per unit of time. Saving is that part of after-tax income that is not spent. It is also a flow. Savings is sometimes used as a synonym for wealth (a term we will not use in thi
4、s course).,Semantic Traps: Money, Income, and Wealth,5 of 36,Your financial wealth, or simply wealth, is the value of all your financial assets minus all your financial liabilities. Wealth is a stock variablemeasured at a given point in time. Investment is a term economists reserve for the purchase
5、of new capital goods, such as machines, plants, or office buildings. The purchase of shares of stock or other financial assets is financial investment.,Semantic Traps: Money, Income, and Wealth,6 of 36,The demand for money: increases in proportion to nominal income ($Y), and depends negatively on th
6、e interest rate (through L(i) ,note the negative sign underneath L(i) ).,7 of 36,Deriving the Demand for Money,The Demand for Money,Figure 4 - 1,For a given level of nominal income, a lower interest rate increases the demand for money. At a given interest rate, an increase in nominal income shifts t
7、he demand for money to the right.,8 of 36,The Demand for Money and the Interest Rate: The Evidence,Using this equation, you can find out how much the demand for money responds to changes in the interest rate( through L(i) ). Because L(i) is a decreasing function of the interest rate i, this equation
8、 says: When the interest rate is low, then L(i) is high, so the ratio of money demand to nominal income should be high. When the interest rate is high, then L(i) is low, so the ratio of money demand to nominal income should be low.,9 of 36,Figure 4 - 1,The Ratio of Money Demand to Nominal Income and
9、 the Interest Rate since 1960,The ratio of money to nominal income has decreased over time. Leaving aside this trend, the interest rate and the ratio of money to nominal income typically move in opposite directions.,The Demand for Money and the Interest Rate: The Evidence,10 of 36,Figure 4 -1 sugges
10、ts two main conclusions: The first is that there has been a large decline in the ratio of money demand to nominal income since 1960.Economists sometimes refer to the inverse of the ratio of money demand to nominal income ($Y/Md) as the velocity of money. The second conclusion is that there is a nega
11、tive relation between year-to-year movements in the ratio of money demand to nominal income and year-to-year movements in the interest rate.,The Demand for Money and the Interest Rate: The Evidence,11 of 36,Figure 4 - 2,Changes in the Interest Rate Versus Changes in the Ratio of Money Demand to Nomi
12、nal Income since 1960,Increases in the interest rate have typically been associated with a decrease in the ratio of money to nominal income, decreases in the interest rate with an increase in that ratio.,A scatter diagram is a figure in which one variable is plotted against another. Each point in th
13、e figure shows the values of these two variables at a point in time.,The Demand for Money and the Interest Rate: The Evidence,12 of 36,The Determination of the Interest Rate. i,In this section, we assume that checkable deposits do not exist that the only money in the economy is currency. The role of
14、 banks as suppliers of money (and checkable deposits) is introduced in the next section.,4-2,13 of 36,Money Demand, Money Supply, and the Equilibrium Interest Rate,Equilibrium in financial markets requires that money supply be equal to money demand, or that Ms = Md. Then using this equation, the equ
15、ilibrium condition is: Money Supply = Money demand This equilibrium relation is called the LM relation.,14 of 36,Money Demand, Money Supply, and the Equilibrium Interest Rate,The interest rate must be such that the supply of money (which is independent of the interest rate) be equal to the demand fo
16、r money (which does depend on the interest rate).,The Determination of the Interest Rate,Figure 4 - 2,15 of 36,Money Demand, Money Supply, and the Equilibrium Interest Rate,An increase in nominal income leads to an increase in the interest rate.,The Effects of an Increase in Nominal Income on the Interest Rate,Figure 4 - 3,16 of 36,Money Demand, Money Supply, and the Equilibrium Interest Rate,Figure 4 - 4,An increase in the supply of money leads to a decrease in the interest rate.,
