The Role of Money and Credit

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Presentation transcript:

The Role of Money and Credit CHAPTER 3 The Role of Money and Credit

The Demand for Money Interest Rate (Percent) Quantity of Money Demand

Changes in the Quantity Demanded of Money Versus Changes in the Demand for Money Interest Rate (Percent) (b) Quantity of Money Decrease Increase Demand Interest Rate (Percent) 100 110 (a) Quantity of Money Demand 5 3

The Supply of Money Quantity of Money Interest Rate (Percent)

Changes in the Supply of Money Quantity of Money Interest Rate (Percent) Supply Decrease Increase

Market Equilibrium Supply Interest Rate (Percent) ie Demand Quantity of Money

An Increase in the Demand for Money Quantity of Money Interest Rate (Percent) i' e Supply Demand i DD D'D'

An Increase in the Supply of Money Interest Rate (Percent) SS S'S' i e i' e Demand Quantity of Money

How Money Matters: An Illustration Federal Reserve Acts Interest Rates, Money Supply, and Credit Flows Changes Aggregate Demand for Goods and Services Shifts Economy’s Output and Prices Respond

Money, Output, and Inflation Sustained Rise in Money and Credit Growth Rate Increases in Output (Real and Nominal GDP) Increases in Inflation with a Lag Sustained Fall in Money and Credit Growth Rate Decreases in Output (Real and Nominal GDP) Decreases in Inflation with a Lag