1. Slide 14-1Copyright © 2003 Pearson Education, Inc. Q2Q2 1'1' The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-5: Effect on the Interest Rate of a Rise in Real Income L(R,Y1)L(R,Y1) L(R,Y 2 ) Increase in real income Real money supply MS PMS P ( = Q 1 ) R2R2 2 R1R1 1 Interest rate, R Real money holdings

2. Slide 14-2Copyright © 2003 Pearson Education, Inc.  Output and the Interest Rate An increase (fall) in real output raises (lowers) the interest rate, given the price level and the money supply. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

3. Slide 14-3Copyright © 2003 Pearson Education, Inc. The Money Supply and the Exchange Rate in the Short Run  Short run analysis The price level and the real output are given.  Long run analysis The price level is perfectly flexible and always adjusted immediately to preserve full employment.

4. Slide 14-4Copyright © 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  模型目的。

5. Slide 14-5Copyright © 2003 Pearson Education, Inc.  Linking Money, the Interest Rate, and the Exchange Rate The U.S. money market determines the dollar interest rate, which in turn affects the exchange rate that maintains the interest parity. –Figure 14-6 links the U.S. money market (bottom) and the foreign exchange market (top). The Money Supply and the Exchange Rate in the Short Run

6. Slide 14-6Copyright © 2003 Pearson Education, Inc. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-6: Simultaneous Equilibrium in the U.S. Money Market and the Foreign-Exchange Market Return on dollar deposits Expected return on euro deposits L(R $, Y US ) E 1 $/€ 1'1' R1$R1$ 1 U.S. real money supply M S US P US Rates of return (in dollar terms) Dollar/euro exchange Rate, E $/€ 0 Foreign exchange market U.S. real money holdings (increasing) Money market

7. Slide 14-7Copyright © 2003 Pearson Education, Inc. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-7: Money-Market/Exchange Rate Linkages European money market United States money market Europe European System of Central Banks United States Federal Reserve System (United States money supply) M S US MSEMSE (European money supply) R $ (Dollar interest rate) R € (Euro interest rate) Foreign exchange market E $/€ (Dollar/Euro exchange rate)

8. Slide 14-8Copyright © 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

9. Slide 14-9Copyright © 2003 Pearson Education, Inc. Expected return on euro deposits The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-8: Effect on the Dollar/Euro Exchange Rate and Dollar Interest Rate of an Increase in the U.S. Money Supply E 2 $/€ 2'2' U.S. real money holdings Rates of return (in dollar terms) Dollar/euro exchange Rate, E $/€ 0 Return on dollar deposits L(R $, Y US ) E 1 $/€ 1'1' R1$R1$ 1 M 1 US P US R2$R2$ 2 Increase in U.S. real money supply M 2 US P US

10. Slide 14-10Copyright © 2003 Pearson Education, Inc. Expected return on euro deposits The Equilibrium Interest Rate: The Interaction of Money Supply and Demand Figure 14-8: Effect on the Dollar/Euro Exchange Rate and Dollar Interest Rate of an Increase in the U.S. Money Supply E 2 $/€ 2'2' U.S. real money holdings Rates of return (in dollar terms) Dollar/euro exchange Rate, E $/€ 0 Return on dollar deposits L(R $, Y US ) E 1 $/€ 1'1' R1$R1$ 1 M 1 US P US R2$R2$ 2 Increase in U.S. real money supply M 2 US P US

11. Slide 14-11Copyright © 2003 Pearson Education, Inc.  U.S. Money Supply and the Dollar/Euro Exchange Rate What happens when the Federal Reserve changes the U.S. money supply? –An increase (decrease) in a country’s money supply causes its currency to depreciate (appreciate) in the foreign exchange market. The Equilibrium Interest Rate: The Interaction of Money Supply and Demand