Chapter 4Financial Market 1: The Demand for Money 4-2. The determination of the Interest Rate: I 4-3 The determination of the lnterest Rate: II 2003-6-29
2003-6-29 1 Chapter 4:Financial Market 4-1:The Demand for Money 4-2:The Determination of the Interest Rate:Ⅰ 4-3: The Determination of the Interest Rate:Ⅱ
4-1:The Demand for Money Assume that you the choice between only two financial assets OMoney, which can be used for transactions, but pays zero interest. In reality, there are two types of money currency, the coins and bills issued by the central bank, and checkable deposits, the bank deposits on which you can write checKs OBonds, which cannot be used for transactions, but pay a positive interest rate, In reality there are many other assets than money, and in particular many types of bonds each associated with a specific interest rate 2003-6-29
2003-6-29 2 4-1:The Demand for Money Assume that you the choice between only two financial assets: ●Money , which can be used for transactions, but pays zero interest. In reality, there are two types of money: currency,the coins and bills issued by the central bank, and checkable deposits, the bank deposits on which you can write checks. ●Bonds, which cannot be used for transactions, but pay a positive interest rate,i. In reality there are many other assets than money, and in particular many types of bonds, each associated with a specific interest rate
The relation between the demand for money, nominal income and the interest rate O Md=SYl( (41) ●Mp/$Y=L() (4.2) o The demand for money increases in proportion to nominal income o The demand for money depends on the interest rate. This is captured by the function L( and the negative sign underneath An increase in the interest rate decreases the demand for money. 2003-6-29 3
2003-6-29 3 The relation between the demand for money, nominal income, and the interest rate Md =$YL(i) (4.1) (-) Md /$Y=L(i) (4.2) ⚫ The demand for money increases in proportion to nominal income. ⚫ The demand for money depends on the interest rate. This is captured by the function L(i) and the negative sign underneath: An increase in the interest rate decreases the demand for money
The Demand for Money M(for SY'>SY) M (for nominal income SY)
The Demand for Money i Md1(for $Y'>$Y) Md (for nominal income $Y) M M
4-2:The Determination of the Interest Rate: I Money Demand, Money Supply, and the Equilibrium Interest Rate S Monetary Policy and Open Market Operations 2003-6-29 5
2003-6-29 5 4-2:The Determination of the Interest Rate:Ⅰ Money Demand, Money Supply, and the Equilibrium Interest Rate Monetary Policy and Open Market Operations