Term
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Definition
| Change in Deposits = Change in Reserves = 1/rr |
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Term
| Money Multiplier Equation |
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Definition
m=C+D/C+R
C+D=Money Supply
C+R=Monetary Base |
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Term
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Definition
| Md=L0-L1(inlfation exp.)+L2(Y)-L3(r) |
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Term
| Interest Rate Formula (from Money Demand) |
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Definition
| r=[L0-L1(inflation exp.)+L2(Y)-MD]/L3 |
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Term
| Reasons for holding more money |
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Definition
stock market gets riskier
bond prices increase
interest rate decreases
income increases |
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Term
| effects of holding more money |
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Definition
Money demand shifts right, so...
interest rate increases
bond prices drop
LM curve shifts left |
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Term
| Effects of increase in money supply |
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Definition
Interest rates drop
LM shifts down and to the right |
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Term
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Definition
| Draw money market graph. r is y axis and m is x axis. MS is vertical and MD is downward sloping. When MD increases (from increase in income or whatever) so does r. To the right of this graph put the LM graph with r as y axis and Y as x axis. Slope of upward sloping LM curve is L2(income elasticity) over L3 (interest rate elasticity) |
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Term
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Definition
| inelastic, steep MD curve and LM curve. takes a big increase in r to get to equilibrium. |
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Term
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Definition
| elastic, flat MD and LM curve. takes small change in r to get to equilibrium. |
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Term
| Classical vs Keynes on elasticity |
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Definition
Classical: L3=0(perfectly inelastic/steep)
Keynes: L3=infinity(perfectly elastic/flat);liquidity trap |
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Term
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Definition
| Increase in MS: Down on LM curve |
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