1. PowerPoint Presentation by Charlie Cook Copyright © 2004 South-Western. All rights reserved. Chapter 8 Money in the Traditional Keynesian System

2. 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?

3. 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?

4. Copyright © 2004 South-Western. All rights reserved.8–4 Figure 8–1 The Money Demand Schedule

5. Copyright © 2004 South-Western. All rights reserved.8–5 Figure 8–2 The Demand for Real Money Balances

6. 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.

7. Copyright © 2004 South-Western. All rights reserved.8–7 Figure 8–4 The Nominal Money Supply Schedule

8. Copyright © 2004 South-Western. All rights reserved.8–8 Figure 8–5 The Supply of Real Money Balances

9. Copyright © 2004 South-Western. All rights reserved.8–9 Figure 8–6 Attaining Equilibrium in the Market for Real Money Balances

10. Copyright © 2004 South-Western. All rights reserved.8–10 Figure 8–7 The Liquidity Effect of Monetary Policy

11. Copyright © 2004 South-Western. All rights reserved.8–11 Figure 8–8 The Real Balance Effect

12. Copyright © 2004 South-Western. All rights reserved.8–12 Figure 8–9 The Derivation of the LM Schedule

13. Copyright © 2004 South-Western. All rights reserved.8–13 Figure 8–10 The Interest Elasticity of Money Demand

14. 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

15. 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

16. 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

17. 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

18. 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

19. Copyright © 2004 South-Western. All rights reserved.8–19 Figure 8–14 The Derivation of the IS Schedule

20. 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

21. Copyright © 2004 South-Western. All rights reserved.8–21 Figure 8–16 A Change in Autonomous Expenditures and the Position of the IS Schedule

22. Copyright © 2004 South-Western. All rights reserved.8–22 Figure 8–17 The Portion of U.S. Households Owning Corporate Stock

23. Copyright © 2004 South-Western. All rights reserved.8–23 Figure 8–18 IS-LM Equilibrium and Disequilibrium

24. Copyright © 2004 South-Western. All rights reserved.8–24 Figure 8–19 The Effect of an Increase in the Nominal Money Stock

25. Copyright © 2004 South-Western. All rights reserved.8–25 Figure 8–20 The Keynesian Transmission Mechanism of Monetary Policy

26. 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

27. 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.