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10 Cards in this Set

  • Front
  • Back
monetary theory
study of effect of money on the economy
velocity of money
avg # of times a dollar is spent in buying the total amt of goods and services produced in the economy
V=PxY/M
equation of exchange
relates nominal income to quantity of $ and velocity
MxchangeV = PxchangeinY
quantity theory of money
nominal income is det. solely by movements in the quantity of money
quantity theory of money demand
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
Is velocity constant?
no; declines during recessions and increases during expansions
Liquidity Preference theory motives:
transaction, precautionary, and speculative
Md/P is a function of interest rate and income
transactions motive
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
Transactions D for money
as i increase
as transactions costs decr.
Md dec., V incr.
speculative motive
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