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What is MS?
money supply
What is money used for?
payments. They are Liquid but yielding no returns.
What are Bonds?
They cannot be used for payments. Bonds represent all non-liquid assets that provide a return.
What happens with the money demand if there is a higher Price level or higher real GDP?
The money demand gets higher.
What happens if interest rates are higher?
Lowe money demand, Because it “costs” us more to have the money at a non-interest’ account.
What is MD?
Money demand
What is P?
Price level =P
What is Y?
Income =Y
What is R?
Nominal interest rate = R
What is L(R,Y)?
- real money demand, or
- liquidity demand, or
- Purchasing power demanded.
What does Expansionary monetary policy leads to?
Increased money supply and Lower interest rates.
What does Higher income leads to?
Higher real money demand which leads to excess demand for money and households are demanding higher interest rates to lend as much as before R (up).
Why is CB letting interest rates rise?
Because they have an inflation target and inflation is higher with higher GDP and interest rate rise dampens the effect.
What happens if there is Interest rate cuts in other countries?
Then yields are lower there than here and our currency increases in value, appreciates.
What does a Lower domestic interest rates-lead to?
Depreciation of our currency.
