Intermediate macroeconomics Lecture 8
Intermediate Macroeconomics Lecture 8
The Money market LM Curve OThe theory of liquidity preference M =L(r,Y P L(r) M/P
The Money Market & LM Curve The theory of liquidity preference ( , ) d M L r Y P = s M M P P − − = r M/P M P − − L r( )
The Money market LM Curve ◆ Paul volcker To fight high inflation >Tight money policy (oct.1979) ar Inflation(GDP deflator 78 7.17 79 8.40 80 9.17 9.34 82 6.14 83 3.97 3.7 3.17 2.18
The Money Market & LM Curve Paul Volcker To fight high inflation → Tight money policy (Oct. 1979) Year Inflation (GDP deflator) 78 7.17 79 8.40 80 9.17 81 9.34 82 6.14 83 3.97 84 3.74 85 3.17 86 2.18
The Money market LM Curve How does such a monetary tightening nfluence interest rate It depends LR: Fisher effect: inflation↓→ interest rate↓ SR: Liquidity theory:M↓→ interest rate↑
The Money Market & LM Curve How does such a monetary tightening influence interest rate? It depends… LR: Fisher effect: inflation↓→ interest rate ↓ SR: Liquidity theory: M ↓→ interest rate ↑
The Money market LM Curve iNcome, money demand, Lm curve M -21 LM L(r, Y2) L(r,YD) M/P Y1 Y2 Y
The Money Market & LM Curve Income, money demand, & LM curve r M/P M P − − L r Y ( , 1) r2 r1 L r Y ( , 2) r Y1 Y2 Y LM