1. The Role of Money and interest rates
Monetary Policy
The Role of Money and interest rates

2. QE
Hopefully a better explanation

3. The transmission mechanism
Monetary Policy
The transmission mechanism
One side
RISES
Other side
FALLS
Alternative – W or L on forehead ….!
Mrs Gordon's notes 3

4. Transmission Mechanism…. What would happen if IR’s rise?

5. Transmission Mechanism if IR’s rise

6. Functions of Money A medium of exchange A store of value or wealth
A unit of account
A standard of deferred payment

7. Defining money Liquidity
The degree to which financial assets can be easily converted into money
Cash
Current account
Deposit account
Treasury bills
Property
Narrow money M0
Broad money M4

9. Demand for Money Income Rate of interest
The higher the income the greater demand for money for spending
Rate of interest
The higher the rate the greater ‘yield’
Nominal interest rates
Real interest rates

10. KEYNESIAN DEMAND FOR MONEY - LIQUIDITY PREFERENCE
TRANSACTIONS DEMAND - this is money used for the purchase of goods and services. The transactions demand for money is positively related to real incomes and inflation.
PRECAUTIONARY BALANCES - this is money held to cover unexpected items of expenditure. As with the transactions demand for money, it is positively correlated with real incomes and inflation.
SPECULATIVE BALANCES - this is money not held for transaction purposes but in place of other financial assets, usually because they are expected to fall in price. 

12. Demand for money or the liquidity preference curve

14. Financial innovation

15. Equilibrium rate of interest
This assumes a fixed money supply

16. Using a liquidity preference diagram, what would be the effect of the following on the rate of interest
A fall in the money supply
A rise in inflation
Increase in money substitutes
A fall in real national income
An increase in quantitative easing

18. Loanable funds theory
Demand for funds comes from firms and governments wanting to invest.

20. Example question
‘It is better to do everything you can to prevent deflation before it begins, even if there is only a small chance of it occurring.’
0 7 Explain how monetary policy might be used to prevent a period of deflation.
(15 marks)