Documente Academic
Documente Profesional
Documente Cultură
A. Assumption
It is assumed that there are only 2 types of financial asset :
(1) Money
It is perfectly liquid financial asset, but earns no .
(2) Bonds
It is less liquid but earn returns.
All bonds are assumed to be perpetuities the price/market value of bond :
Pb =
when r falls (given a fixed interest payment), Pb
Hence r and Pb are related.
1
Msp is related to r.
**According to Keynesian, if the current rate of interest is very low, people will
believe that it is the minimum r and they would all hold their financial assets in
the Md curve ( = Mt + Msp) may be perfectly at a certain low
interest rate. This perfectly elastic portion of Md curve is called the
(p.130)
** In a new approach Msp is treated as demand for money (Ma)
Holding financial assets as money provides the owners with ,
in nominal value and reduced , but it involves the opportunity cost of
forgone income. the higher the opportunity cost (r), the lower the
amount of Ma Ma is related to r.
(1) Endogenous Ms
2
(2) Exogenous Ms
Remarks :
To Keynes, change in Ms will first have impact on the market rather than goods
market (AD).
E.g. When Ms rises people hold more money than they want at the going r
spend on buying Pb r I AD/AE Q/Y .
The above is called the Keynesian money transmission mechanism.
3
(b) Varying the discount rate
(b) flows
(e) Time
4
(2) The equation of exchange (by Irving Fisher) and the quantity equation of money
(i) By rearranging (a), we get the equation of exchange (Fisher’s equation)
(It is an , too.)
=
as M , P
Remarks :
(a) Relationship between k and V
When Ms increases people hold money that they want at the going r
5
for an individual, he can spend the excess money on buying goods and services
without affecting the .
However, if all individuals in the economy do this, P would be .