Slide 14-1Copyright © 2003 Pearson Education, Inc.  Three factors influence money demand: Expected return Risk Liquidity  Expected Return The interest rate measures the opportunity cost of holding money rather than interest-bearing bonds. –A rise in the interest rate raises the cost of holding money and causes money demand to fall. The Demand for Money by Individuals

Slide 14-2Copyright © 2003 Pearson Education, Inc.  Risk Holding money is risky. –An unexpected increase in the prices of goods and services could reduce the value of money in terms of the commodities consumed. Changes in the risk of holding money need not cause individuals to reduce their demand for money. –Any change in the riskiness of money causes an equal change in the riskiness of bonds. The Demand for Money by Individuals

Slide 14-3Copyright © 2003 Pearson Education, Inc.  Liquidity The main benefit of holding money comes from its liquidity. –Households and firms hold money because it is the easiest way of financing their everyday purchases. A rise in the average value of transactions carried out by a household or firm causes its demand for money to rise. The Demand for Money by Individuals

Slide 14-4Copyright © 2003 Pearson Education, Inc. Aggregate Money Demand  Aggregate money demand The total demand for money by all households and firms in the economy. It is determined by three main factors: –Interest rate –It reduces the demand for money. –Price level –It raises the demand for money. –Real national income –It raises the demand for money.

Slide 14-5Copyright © 2003 Pearson Education, Inc.  The aggregate demand for money can be expressed by: M d = P x L(R,Y) (14-1) where: P is the price level Y is real national income L(R,Y) is the aggregate real money demand  Equation (14-1) can also be written as: M d /P = L(R,Y) (14-2) Aggregate Money Demand

Slide 14-6Copyright © 2003 Pearson Education, Inc.  The aggregate demand for money can be expressed by: M d = P x L(R,Y) (14-1) where: P is the price level Y is real national income L(R,Y) is the aggregate real money demand  Equation (14-1) can also be written as: M d /P = L(R,Y) (14-2) Aggregate Money Demand

Slide 14-7Copyright © 2003 Pearson Education, Inc. Figure 14-1: Aggregate Real Money Demand and the Interest Rate L(R,Y)L(R,Y) Interest rate, R Aggregate real money demand Aggregate Money Demand

Slide 14-8Copyright © 2003 Pearson Education, Inc. Figure 14-2: Effect on the Aggregate Real Money Demand Schedule of a Rise in Real Income L(R,Y2)L(R,Y2) Increase in real income L(R,Y1)L(R,Y1) Interest rate, R Aggregate real money demand Aggregate Money Demand

Slide 14-9Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  均衡

Slide 14-10Copyright © 2003 Pearson Education, Inc.  Equilibrium in the Money Market The condition for equilibrium in the money market is: M s = M d (14-3) The money market equilibrium condition can be expressed in terms of aggregate real money demand as: M s /P = L(R,Y) (14-4) The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Slide 14-11Copyright © 2003 Pearson Education, Inc. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-3: Determination of the Equilibrium Interest Rate Aggregate real money demand, L(R,Y) Interest rate, R Real money holdings Real money supply MS PMS P ( = Q 1 ) R2R2 Q2Q2 2 R1R1 1 R3R3 Q3Q3 3

Slide 14-12Copyright © 2003 Pearson Education, Inc.  模型目的。  內生變數：決定模型兩軸。  行為法則：畫出模型曲線。  均衡：決定均衡之內生變數。  外生衝擊 判斷是否為外生變數改變？ 判斷此外生變數之改變將影響哪些行為法則？ 判斷此外生變數之改變造成行為法則何種影響？ 學習經濟模型五步驟  外生衝擊

Slide 14-13Copyright © 2003 Pearson Education, Inc. M2 PM2 P R2R2 2 M1 PM1 P Real money supply Real money supply increase The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-4: Effect of an Increase in the Money Supply on the Interest Rate L(R,Y1)L(R,Y1) R1R1 1 Interest rate, R Real money holdings

Slide 14-14Copyright © 2003 Pearson Education, Inc.  Interest Rates and the Money Supply An increase (fall) in the money supply lowers (raises) the interest rate, given the price level and output. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand