Aggregate Money Demand Aggregate money demand The total demand for money by all households and firms in the economy It is determined by three main factors Interest rate It reduces the demand for money Price level It raises the demand for money. Real national income It raises the demand for money Copyright C 2003 Pearson Education, Inc Slide 14-11
Copyright © 2003 Pearson Education, Inc. Slide 14-11 Aggregate Money Demand ▪ Aggregate money demand • The total demand for money by all households and firms in the economy. • It is determined by three main factors: – Interest rate – It reduces the demand for money. – Price level – It raises the demand for money. – Real national income – It raises the demand for money
Aggregate Money Demand The aggregate demand for money can be expressed by M=PXL(R, Y (14-1) P is the price level Y is real national income L(R, Y is the aggregate real money demand Equation (14-1) can also be written as M/P=L(R,n (14-2) Copyright C 2003 Pearson Education, Inc Slide 14-12
Copyright © 2003 Pearson Education, Inc. Slide 14-12 ▪ The aggregate demand for money can be expressed by: Md = P x L(R,Y) (14-1) where: P is the price level Y is real national income L(R,Y) is the aggregate real money demand ▪ Equation (14-1) can also be written as: Md /P = L(R,Y) (14-2) Aggregate Money Demand
Aggregate Money Demand Figure 14-1: Aggregate Real Money demand and the Interest rate Interest rate, r L(R,Y Aggregate real money demand Copyright C 2003 Pearson Education, Inc Slide 14-13
Copyright © 2003 Pearson Education, Inc. Slide 14-13 Figure 14-1: Aggregate Real Money Demand and the Interest Rate L(R,Y) Interest rate, R Aggregate real money demand Aggregate Money Demand
Aggregate Money Demand Figure 14-2: Effect on the Aggregate Real Money Demand Schedule of a rise in real income Interest rate, R Increase in real income L(R,Y2) L(R,Y) Aggregate real Copyright C 2003 Pearson Education, Inc money demand Slide 14-14
Copyright © 2003 Pearson Education, Inc. Slide 14-14 Figure 14-2: Effect on the Aggregate Real Money Demand Schedule of a Rise in Real Income L(R,Y2 ) Increase in real income L(R,Y1 ) Interest rate, R Aggregate real money demand Aggregate Money Demand