PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 8 Money in the Traditional Keynesian System
Copyright © 2004 South-Western. All rights reserved.8–2 Fundamental Issues 1.What are the key motives for holding money, and what variables do they indicate should influence the demand for money? 2.How is the nominal interest rate determined in the traditional Keynesian model? 3.What is the LM schedule, and what factors determine its elasticity and position? 4.What is the IS schedule, and what factors determine its elasticity and position?
Copyright © 2004 South-Western. All rights reserved.8–3 Fundamental Issues (cont’d) 5.What is an IS-LM equilibrium, and what are the implications of the IS-LM framework for the transmission mechanism of monetary policy? 6.How does government spending influence real income in the traditional Keynesian model?
Copyright © 2004 South-Western. All rights reserved.8–4 Figure 8–1 The Money Demand Schedule
Copyright © 2004 South-Western. All rights reserved.8–5 Figure 8–2 The Demand for Real Money Balances
Copyright © 2004 South-Western. All rights reserved.8–6 Source: Bureau of Labor Statistics. Figure 8–3 The Falling Purchasing Power of a Dollar A dollar bill issued today buys less than what a nickel would have purchased in 1900.
Copyright © 2004 South-Western. All rights reserved.8–7 Figure 8–4 The Nominal Money Supply Schedule
Copyright © 2004 South-Western. All rights reserved.8–8 Figure 8–5 The Supply of Real Money Balances
Copyright © 2004 South-Western. All rights reserved.8–9 Figure 8–6 Attaining Equilibrium in the Market for Real Money Balances
Copyright © 2004 South-Western. All rights reserved.8–10 Figure 8–7 The Liquidity Effect of Monetary Policy
Copyright © 2004 South-Western. All rights reserved.8–11 Figure 8–8 The Real Balance Effect
Copyright © 2004 South-Western. All rights reserved.8–12 Figure 8–9 The Derivation of the LM Schedule
Copyright © 2004 South-Western. All rights reserved.8–13 Figure 8–10 The Interest Elasticity of Money Demand
Copyright © 2004 South-Western. All rights reserved.8–14 Figure 8–11a The Interest Elasticity of Money Demand and the Elasticity of the LM Schedule: Interest Inelastic
Copyright © 2004 South-Western. All rights reserved.8–15 Figure 8–11b The Interest Elasticity of Money Demand and the Elasticity of the LM Schedule: Interest Elastic
Copyright © 2004 South-Western. All rights reserved.8–16 Figure 8–12a Changes in the Real Money Supply and in the Position of the LM Schedule : Increase in Nominal Money Stock
Copyright © 2004 South-Western. All rights reserved.8–17 Figure 8–12b Changes in the Real Money Supply and in the Position of the LM Schedule : Change in Price Level
Copyright © 2004 South-Western. All rights reserved.8–18 Figure 8–13 The Effect of a Fall in the Demand for Real Money Balances on the Position of the LM Schedule
Copyright © 2004 South-Western. All rights reserved.8–19 Figure 8–14 The Derivation of the IS Schedule
Copyright © 2004 South-Western. All rights reserved.8–20 Figure 8–15 The Interest Elasticity of Desired Investment and the Elasticity of the IS Schedule
Copyright © 2004 South-Western. All rights reserved.8–21 Figure 8–16 A Change in Autonomous Expenditures and the Position of the IS Schedule
Copyright © 2004 South-Western. All rights reserved.8–22 Figure 8–17 The Portion of U.S. Households Owning Corporate Stock
Copyright © 2004 South-Western. All rights reserved.8–23 Figure 8–18 IS-LM Equilibrium and Disequilibrium
Copyright © 2004 South-Western. All rights reserved.8–24 Figure 8–19 The Effect of an Increase in the Nominal Money Stock
Copyright © 2004 South-Western. All rights reserved.8–25 Figure 8–20 The Keynesian Transmission Mechanism of Monetary Policy
Copyright © 2004 South-Western. All rights reserved.8–26 Figure 8–21 The Effects of an Increase in Government Spending in the IS-LM Model
Copyright © 2004 South-Western. All rights reserved.8–27 Figure 8–22 Short-Term Interest Rates in Japan since 1990 Interest rates have hovered near zero in Japan since 1999.