ECON 2000 Lecture Notes - Lecture 3: Nominal Interest Rate, Demand For Money, Monetary Base

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Monetary base is what we can physically count. M=mxb m=(c/d +1)/(c/d + r/d) --------- m is always greater than (>) 1 and fixed. Change in (triangle shape) variable x = change in (triangle shape) x. Triangle m/triangle b = 400/100 = 4 = m. At 10% quantity of money demanded is . More spending means we need more liquid assets. If price level increases, money demand shifts to the right. Suppose you lend me and after 1 year i will pay you . Future value (after 1 year) = present value (1+ nominal interest rate) If we allow future value to grow for one more year at the end of 2nd year, Fvn = pv(1+i)^n: = pv (1+0. 10) 3rd option is the best option because you choose which one will have the higher present value. Present value is the price of the financial asset. Asset is a bond that matures in 3 years.

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