MGEC61H3 Chapter 14: Chapter 14 Notes
19 Dec 2010
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Chapter 14: money, interest rate, and exchange rate. How the money supply is determined: money supply: currency circulation + demand deposit, a country"s money supply is determined by its central bank, i. e. , we take money supply as given. Aggregate money demand: aggregate money demand: the total demand for money by all households and firms in the economy, three factors affect/determine aggregate money demand, the (nominal) interest rate, r, the price level, p, real national income, y: In notation form, aggregate money demand can be expressed as: d. Yr,lpm: usually, we express money demand in real terms: The equilibrium interest rate: the interaction of money supply and demand. Equilibrium in the money market: money market is in equilibrium when (real) money demand = (real) money supply: P: given the price level (p) and real output (y), the nominal interest rate (r) adjusts to equate real money demand to real money supply.
