1. The Demand for Money Chapter 8

2. 2 ©1999 South-Western College Publishing Figure 8.1 The Balance Sheet of Households and Firms Households AssetsLiabilities Corporate bonds P B B MoneyM WW W Net worth AssetsLiabilities Firms Capital stock PK PK Corporate bonds P B B PBBPBB

3. 3 ©1999 South-Western College Publishing Figure 8.2 How the Household Allocates Wealth M/P (Real money balances) (M/P) * (M/P) 1 Y (Real income) Y MAX Y*Y* Y1Y1 i U1U1 U2U2 Every combination of real balances and real income on the same indifference curve yields equal utility. Indifference curves further to the northeast represent combinations that yield higher utility.

4. 4 ©1999 South-Western College Publishing Figure 8.3 How Equilibrium is Established Y (M S /P) 1 = (M D /P) 1 (M S /P) 2 = (M D /P) 2 i1i1 i2i2 E2E2 E1E1 A

5. 5 ©1999 South-Western College Publishing Box 8.1A Velocity of circulation (left scale); Units: 1/years Interest rate (right scale); Units: % per year 19001920194019601980 8 6 4 2 0 5 15 10 0 Comparing the Quantity Theory of Money and the Modern Theory of the Demand for Money Panel A

6. 6 ©1999 South-Western College Publishing Box 8.1B Correlation coefficient = 0.74 Interest rate Velocity of circulation 0.8 0.6 0.4 0.0 0.2 Comparing the Quantity Theory of Money and the Modern Theory of the Demand for Money 510150 Panel B

7. 7 ©1999 South-Western College Publishing Figure 8.4A Deriving the LM Curve i (Interest rate) i1i1 i2i2 Y (Income) Y1Y1 Y*Y* Y2Y2 Panel A LM A B

8. 8 ©1999 South-Western College Publishing Figure 8.4B Deriving the LM Curve i (Interest rate) (Quantity of money demanded and supplied) MS/PMS/P Panel B L, M S /P L(Y1)L(Y1) L(Y2)L(Y2) Two money demand curves

9. 9 ©1999 South-Western College Publishing Figure 8.5A Y (Income) How an Increase in the Money Supply Shifts the LM Curve i (Interest rate) A B Panel A Y1Y1 LM(M 1 /P) LM(M 2 /P) i2i2 i1i1

10. 10 ©1999 South-Western College Publishing Figure 8.5B L, M S /P (Money demand and supply) How an Increase in the Money Supply Shifts the LM Curve i (Interest rate) M1/PM1/PM2/PM2/P A B Panel B L(Y1)L(Y1)

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