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10 Cards in this Set
- Front
- Back
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monetary theory
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study of effect of money on the economy
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velocity of money
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avg # of times a dollar is spent in buying the total amt of goods and services produced in the economy
V=PxY/M |
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equation of exchange
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relates nominal income to quantity of $ and velocity
MxchangeV = PxchangeinY |
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quantity theory of money
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nominal income is det. solely by movements in the quantity of money
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quantity theory of money demand
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M = 1/V x PY
when in eq., Md = k x PY, velocity is constant demand for money is a function of income, and interest rates have no effect on Md |
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Is velocity constant?
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no; declines during recessions and increases during expansions
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Liquidity Preference theory motives:
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transaction, precautionary, and speculative
Md/P is a function of interest rate and income |
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transactions motive
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indiv. hold $ b/c it is a medium of exchange that can be used to cary out everyday transactions; transactions are proportional to income
higher the nominal interest rate, less hold as money, higher the velocity of money |
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Transactions D for money
as i increase as transactions costs decr. |
Md dec., V incr.
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speculative motive
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if indiv. believe i is below normal value, will expect i to rise iand future and would rather hold their wealth as money then bonds; Md will be high
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