Chapter 22 The Demand for Money I Quantity Theory of Money a How the nominal value of aggregate income is determined b Theory for the demand of money c d Velocuty of Money Interest rates have no effect on the demand for money the average number of times per year turnover that a dollar is spent in buying the total amount of goods and services produced in the economy i V P Y M 1 V Velocity 2 P price level 3 Y aggregate output income 4 M quantity of Money ii Rise in charge accounts and credit cards to conduct transactions the use of money goes down less money is required for transactions and velocity increases e Equation of Exchange relates nominal income to the quantity of money and velocity i M V P Y ii Quantity of money multiplied by the number of times that the money is spent in a given year must equal nominal income f Quantity Theory of Money movements in the quantity of money When the quantity of money M doubles M V doubles and so must P Y the value of the nominal indicator nominal income is determinied solely by i V and Y are treated as constants in the short run ii Movemetns in the price level result solely from changes in the quantity of money g Quantity Theory of Money Demand i The demand for money is purely a function of income interests rates have no effect on the demand for money ii Demand for money factors 1 2 level of transactions generatred by the level of nominal income PY the institutions in the economy that affect the way people conduct transactions and thus determine velocity and k II Is Velocity a Constant a Velocity can not be viewed as a constant b It is too volatile III Keynes s Liquidity Preference Theory a Why do people hold money i Transaction motives 1 medium of exchange to carry out everyday transactions 2 proportional to income ii Precautionary motives 1 also proportional to income 2 people want a cushion a b security take advantage of a sale or things they want to purchase iii Speculative motive 1 wealth is tied to income a people look at interest rates 2 2 categories a Money b Bonds 3 If people thought interest rates were to rise then they would hold more money in cash b Money Demand is negatively related to the level of interest rates c Md P f i Y i Money is negatively related to interest rates fall in i leads to a rise in Md 1 ii Md quantity of money demanded iii Y real income 1 positively related to real money
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