Download Aggregate money demand

The Demand for
Money by Individuals
 Three factors influence money demand:
• Expected return
• Risk
• Liquidity
 Expected Return
• The interest rate measures the opportunity cost of
holding money rather than interest-bearing bonds.
– A rise in the interest rate raises the cost of holding
money and causes money demand to fall.
Copyright © 2003 Pearson Education, Inc.
Slide 14-1
The Demand for
Money by Individuals
 Risk
• Holding money is risky.
– An unexpected increase in the prices of goods and
services could reduce the value of money in terms of the
commodities consumed.
• Changes in the risk of holding money need not cause
individuals to reduce their demand for money.
– Any change in the riskiness of money causes an equal
change in the riskiness of bonds.
Copyright © 2003 Pearson Education, Inc.
Slide 14-2
The Demand for
Money by Individuals
 Liquidity
• The main benefit of holding money comes from its
liquidity.
– Households and firms hold money because it is the
easiest way of financing their everyday purchases.
• A rise in the average value of transactions carried out
by a household or firm causes its demand for money to
rise.
Copyright © 2003 Pearson Education, Inc.
Slide 14-3
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 © 2003 Pearson Education, Inc.
Slide 14-4
Aggregate Money Demand
 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)
Copyright © 2003 Pearson Education, Inc.
(14-2)
Slide 14-5
Aggregate Money Demand
 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)
Copyright © 2003 Pearson Education, Inc.
(14-2)
Slide 14-6
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 © 2003 Pearson Education, Inc.
Slide 14-7
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,Y1)
Copyright © 2003 Pearson Education, Inc.
Aggregate real
money demand
Slide 14-8
學習經濟模型五步驟
模型目的。
內生變數：決定模型兩軸。
行為法則：畫出模型曲線。
均衡：決定均衡之內生變數。
均衡
外生衝擊
• 判斷是否為外生變數改變？
• 判斷此外生變數之改變將影響哪些行為法則？
• 判斷此外生變數之改變造成行為法則何種影響？
Copyright © 2003 Pearson Education, Inc.
Slide 14-9
The Equilibrium Interest Rate: The
Interaction of Money Supply and Demand
 Equilibrium in the Money Market
• The condition for equilibrium in the money market is:
Ms = M d
(14-3)
• The money market equilibrium condition can be
expressed in terms of aggregate real money demand as:
Ms/P = L(R,Y)
(14-4)
Copyright © 2003 Pearson Education, Inc.
Slide 14-10
The Equilibrium Interest Rate: The
Interaction of Money Supply and Demand
Figure 14-3: Determination of the Equilibrium Interest Rate
Interest
rate, R
Real money supply
2
R2
1
R1
3
R3
Q2
Copyright © 2003 Pearson Education, Inc.
MS ( = Q 1 )
P
Q3
Aggregate real
money demand,
L(R,Y)
Real money
holdings
Slide 14-11
學習經濟模型五步驟
模型目的。
內生變數：決定模型兩軸。
行為法則：畫出模型曲線。
均衡：決定均衡之內生變數。
外生衝擊
• 判斷是否為外生變數改變？
• 判斷此外生變數之改變將影響哪些行為法則？
• 判斷此外生變數之改變造成行為法則何種影響？
Copyright © 2003 Pearson Education, Inc.
Slide 14-12
The Equilibrium Interest Rate: The
Interaction of Money Supply and Demand
Figure 14-4: Effect of an Increase in the Money Supply on the Interest
Rate
Interest
rate, R
Real money
supply
R1
Real money
supply increase
1
2
R2
L(R,Y1)
Copyright © 2003 Pearson Education, Inc.
M1
P
M2
P
Real money
holdings
Slide 14-13
The Equilibrium Interest Rate: The
Interaction of Money Supply and Demand
 Interest Rates and the Money Supply
• An increase (fall) in the money supply lowers (raises)
the interest rate, given the price level and output.
Copyright © 2003 Pearson Education, Inc.
Slide 14-14