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Money Demand

Money Demand. Money demand ( demand for real balances ) is influenced : positively by income. Money Demand. Money demand ( demand for real balances ) is influenced : positively by income negatively by interest rates. Money Demand.

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Money Demand

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  1. Money Demand Money demand (demand for real balances) is influenced : positively by income

  2. Money Demand Money demand (demand for real balances) is influenced : positively by income negatively by interest rates.

  3. Money Demand Money demand (demand for real balances) is influenced : positively by income negatively by interest rates. That is: + - md = f ( y , i)

  4. Money Demand: inverse relation between interest rate and real balances r m1d Real balances

  5. Money Demand: inverse relation between interest rate and real balances r m1d Real balances

  6. Equilibrium in the money market M1s (P1) r r1 m1d Real balances

  7. Increase in Demand for Money M1s (P1) r2 r1 m2d m1d Real balances

  8. LM Curve M1s (P1) r m2d m1d Real balances income

  9. LM Curve M1s (P1) r r1 r2 m1d Real balances income

  10. LM Curve LM1(P1) M1s (P1) r r1 r2 m2d m1d Real balances income

  11. LM Curve LM1(P1) M1s (P1) r r1 r2 m2d m1d Real balances income

  12. LM Curve: expansionary monetary policy LM1(P1) M1s (P1) r r1 r2 m2d m1d Real balances income

  13. LM Curve: expansionary monetary policy LM1(P1) M1s (P1) M1s (P2 ) r r1 r2 m2d m1d Real balances income

  14. LM Curve: expansionary monetary policy LM1(P1) M1s (P1) M1s (P2 ) r r1 r2 m2d m1d Real balances income

  15. LM Curve: expansionary monetary policy LM1(P1) M1s (P1) M1s (P2 ) r r1 r2 m2d m1d Real balances income

  16. AD in a Keynesian System LM1(P1) M1s (P1) M1s (P2 ) r r1 LM2(P2) r2 m2d m1d Real balances income

  17. Prices and the LM Prices can change the position of LM the same way changes in the stock of money supply would. A decrease in price level is exactly the same as an increase in the money supply. Both will shift the LM curve to the right. An expansionary monetary policy.

  18. AD in a Keynesian System LM (P1) LM (P2) a’ r1 b’ r2 IS Real income a P1 b P2 AD Real income y1 y2

  19. AD in a Keynesian System LM (P1) LM (P2) a’ r1 b’ r2 IS’ IS G or I or X Real income a P1 b P2 AD’ AD Real income y1 y2

  20. Vertical LM If money demand is completely independent of the interest rates, then it will be vertical and LM will be vertical. In this case, fiscal policy in completely ineffective.

  21. Vertical LM If money demand is completely independent of the interest rates, then it will be vertical and LM will be vertical. In this case, fiscal policy in completely ineffective. This is the case of complete crowding out.

  22. Vertical LM If money demand is completely independent of the interest rates, then it will be vertical and Lm will be vertical. In this case, fiscal policy in completely ineffective. In this case fiscal policy does not have any effect on the AD. Only monetary policy would be effective

  23. Vertical LM LM IS’’ IS’ IS

  24. Expansionary Monetary Policy and AD in a Keynesian System LM (P1) LM (P2) a’ r1 b’ r2 LM (M2 P1) IS Real income LM (M 2 P1) a P1 b P2 AD’ AD Real income y1 y2

  25. Expansionary Monetary Policy and AD in a Keynesian System (Vertical LM) Lm1’ lm1 Lm2’ lm2 r1 Unlike Fiscal Policy monetary policy is very potent r2 IS P1 P2 AD’ AD

  26. Keynesian AS W L1d N1 N2 N

  27. Keynesian AS f(N) y N W N1 N2 N

  28. Keynesian AS f(N) y N W N1 N2 N

  29. Keynesian AS 45 f(N) y y y N AS W P P1 y N1 N2 N y1

  30. Keynesian AS 45 f(N) y y y N AS W P P1 y N1 N2 N y1

  31. Keynesian AS 45 f(N) y y y N W P P2 P1 y N1 N2 N y1 y2

  32. Keynesian AS 45 f(N) y y y N AS W P P2 P1 y N1 N2 N y1 y2

  33. Keynesian AS: Technological advance 45 f(N) y y y N AS AS’ W P P2 P1 y N1 N2 N y1 y2

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