Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster1 of 23PowerPoint Lectures for Principles of Macroeconomics, 9eBy Karl E. Case, Ray C. Fair & Sharon M. Oster ; ;CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster2 of 23PART III THE CORE OF MACROECONOMIC THEORY11© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and OsterMoney Demand andthe EquilibriumInterest RateFernando & Yvonn QuijanoPrepared by:CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster4 of 2311Interest Rates and Bond PricesThe Demand for MoneyThe Transaction MotiveThe Speculation MotiveThe Total Demand for MoneyThe Effects of Income and the PriceLevel on the Demand for MoneyThe Equilibrium Interest RateSupply and Demand in the Money MarketChanging the Money Supply to Affect theInterest RateIncreases in Y and Shifts in the MoneyDemand CurveLooking Ahead: The Federal Reserveand Monetary PolicyAppendix A: The Various Interest Ratesin the U.S. EconomyAppendix B: The Demand for Money: A Numerical ExampleCHAPTER OUTLINEMoney Demand andthe EquilibriumInterest RatePART III THE CORE OF MACROECONOMIC THEORY11CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster5 of 23Interest Rates and Bond PricesInterest The fee that borrowers pay to lenders for the use of their funds. Professor Serebryakov Makes an EconomicErrorUncle Vanyaby Anton ChekhovCHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster6 of 23The Demand for Moneytransaction motive The main reason that people hold money—to buy things. The Transaction MotiveWhen we speak of the demand for money, we are concerned with how much of your financial assets you want to hold in the form of money, which does not earn interest, versus how much you want to hold in interest-bearing securities, such as bonds.CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster7 of 23The Demand for MoneyThe Transaction MotiveIncome arrives only once a month, but spending takes place continuously.  FIGURE 11.1 The Nonsynchronization of Income and SpendingCHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster8 of 23The Demand for Moneynonsynchronization of income and spending The mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses. The Transaction MotiveCHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster9 of 23The Demand for MoneyThe Transaction MotiveJim could decide to deposit his entire paycheck ($1,200) into his checking account at the start of the month and run his balance down to zero by the end of the month. In this case, his average balance would be $600.  FIGURE 11.2 Jim’s Monthly Checking Account Balances: Strategy 1CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster10 of 23The Demand for MoneyThe Transaction MotiveJim could also choose to put half of his paycheck into his checking account and buy a bond with the other half of his income. At midmonth, Jim would sell the bond and deposit the $600 into his checking account to pay the second half of the month’s bills. Following this strategy, Jim’s average money holdings would be $300.  FIGURE 11.3 Jim’s Monthly Checking Account Balances: Strategy 2CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster11 of 23The Demand for MoneyThe Transaction MotiveThe quantity of money demanded (the amount of money households and firms want to hold) is a function of the interest rate. Because the interest rate is the opportunity cost of holding money balances, increases in the interest rate reduce the quantity of money that firms and households want to hold and decreases in the interest rate increase the quantity of money that firms and households want to hold.  FIGURE 11.4 The Demand Curve for Money BalancesCHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster12 of 23The Demand for MoneyThe Speculation Motivespeculation motive One reason for holding bonds instead of money: Because the market price of interest-bearing bonds is inversely related to the interest rate, investors may want to hold bonds when interest rates are high with the hope of selling them when interest rates fall.CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster13 of 23The Demand for MoneyThe Total Demand for MoneyThe total quantity of money demanded in the economy is the sum of the demand for checking account balances and cash by both households and firms.At any given moment, there is a demand for money—for cash and checking account balances. Although households and firms need to hold balances for everyday transactions, their demand has a limit. For both households and firms, the quantity of money demanded at any moment depends on the opportunity cost of holding money, a cost determined by the interest rate.CHAPTER 11 Money Demand and the Equilibrium Interest Rate© 2009 Pearson Education, Inc. Publishing