,Chapter 4:Financial Markets,Click to edit Master title style,*,of 36,2006 Prentice Hall Business Publishing Macroeconomics,4/e Olivier Blanchard,布兰查德宏观经济学-第四版-第04章课件,The Demand for Money,The,Fed,(short for,Federal Reserve Bank,)is the U.S.central bank.,Money,which can be used for transactions,pays no interest.There are two types of money:,currency,and,checkable deposits,.,Bonds,pay a positive interest rate,i,but they cannot be used for transactions.,4-1,2,The Demand for MoneyThe Fed(s,The Demand for Money,The proportions of money and bonds you wish to hold depend mainly on two variables:,Your level of transactions,The interest rate on bonds,Money market funds,pool together the funds of many people and use these funds to buy bonds typically,government bonds.,3,The Demand for MoneyThe propor,Income,is what you earn from working plus what you receive in interest and dividends.It is a,flow,that is,it is expressed per unit of time.,Saving,is that part of after-tax income that is not spent.It is also a flow.,Savings,is sometimes used as a synonym for wealth(a term we will not use in this course).,Semantic Traps:Money,Income,and Wealth,4,Income is what you earn from w,Your,financial wealth,or simply,wealth,is the value of all your financial assets minus all your financial liabilities.Wealth is a,stock,variablemeasured at a given point in time.,Investment,is a term economists reserve for the purchase of new capital goods,such as machines,plants,or office buildings.The purchase of shares of stock or other financial assets is,financial investment,.,Semantic Traps:Money,Income,and Wealth,5,Your financial wealth,or simp,The demand for money:,increases,in proportion to nominal income($,Y,),and,depends,negatively,on the interest rate(,through,L,(,i,),note the negative sign underneath,L,(,i,).,6,The demand for money:6,Deriving the Demand for Money,The Demand for Money,Figure 4-1,For a given level of nominal income,a lower interest rate increases the demand for money.At a given interest rate,an increase in nominal income shifts the demand for money to the right.,7,Deriving the Demand for MoneyT,The Demand for Money and the Interest Rate:The Evidence,Using this equation,you can find out how much the demand for money,responds to changes in the interest rate(through L(,i,).,Because L(,i,)is a decreasing function of the interest rate,i,this equation says:,When the interest rate is low,then L(,i,)is high,so the ratio of money demand to nominal income should be high.,When the interest rate is high,then L(,i,)is low,so the ratio of money demand to nominal income should be low.,=L(,i,),M,d,$Y,8,The Demand for Money and the I,Figure 4-1,The Ratio of Money Demand to Nominal Income and the Interest Rate since 1960,The ratio of money to nominal income has decreased over time.Leaving aside this trend,the interest rate and the ratio of money to nominal income typically move in opposite directions.,The Demand for Money and the Interest Rate:The Evidence,9,Figure 4-1The Ratio of Money,Figure 4-1 suggests two main conclusions:,The first is that there has been a large decline in the ratio of money demand to nominal income since 1960.Economists sometimes refer to the inverse of the ratio of money demand to nominal income,($Y/Md,),as the,velocity,of money.,The second conclusion is that there is a negative relation between year-to-year movements in the ratio of money demand to nominal income and year-to-year movements in the interest rate.,The Demand for Money and the Interest Rate:The Evidence,10,Figure 4-1 suggests two main,Figure 4-2,Changes in the Interest Rate Versus Changes in the Ratio of Money Demand to Nominal Income since 1960,Increases in the interest rate have typically been associated with a decrease in the ratio of money to nominal income,decreases in the interest rate with an increase in that ratio.,A,scatter diagram,is a figure in which one variable is plotted against another.Each point in the figure shows the values of these two variables at a point in time.,The Demand for Money and the Interest Rate:The Evidence,11,Figure 4-2Changes in the Int,The Determination ofthe Interest Rate.,i,In this section,we,assume,that checkable deposits do not exist that the only money in the economy is currency.,The role of banks as suppliers of money(and checkable deposits)is introduced in the next section.,4-2,12,The Determination ofthe Inter,Money Demand,Money Supply,and the Equilibrium Interest Rate,Equilibrium,in financial markets requires that,money supply be equal to money,demand,or that,M,s,=,M,d,.,Then using this equation,the equilibrium condition is:,Money Supply=Money demand,This equilibrium relation is called the,LM,relation,.,13,Money Demand,Money Supply,an,Money Demand,Money Supply,and the Equilibrium Interest Rate,The interest rate must be such that the supply of money(which is independent of the interest rate)be equal to the demand for money(which does depend on the interest rate).,The Determination of the Interest Rate,Figure 4