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Chapter 1 The Demand For Money

The document discusses the demand for money, covering various theories including the Quantity Theory of Money, Keynesian theories, and Friedman’s modern approach. It explains key concepts such as the equation of exchange, liquidity preference, and empirical evidence regarding the sensitivity of money demand to interest rates. The document serves as a lecture outline for a course in monetary and financial theory.

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hoductrung05
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9 views7 pages

Chapter 1 The Demand For Money

The document discusses the demand for money, covering various theories including the Quantity Theory of Money, Keynesian theories, and Friedman’s modern approach. It explains key concepts such as the equation of exchange, liquidity preference, and empirical evidence regarding the sensitivity of money demand to interest rates. The document serves as a lecture outline for a course in monetary and financial theory.

Uploaded by

hoductrung05
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 7

1/11/2021

Chapter 1:
The demand
for money
L E CT UR E R : M S C P H A M T H I T H UY D UNG
M ONE TA RY A ND F I NA NCI A L T H E ORY D E PA R T M E NT
S CH OOL OF BA NK I NG A ND F I NA NCE
T E L : 0 9 6 4 . 4 8 4 . 216
E M A I L : D UNG P T @ NE U. E D U . V N

Content
1.1 Quantity theory of money (Irving Fisher view)
1.2 Keynesian Theories of Money demand
1.3 The modern M. Friedman’s quantity theory of money
1.4 Empirical evidence for the demand for money

References
Chapter 20, The Economics of Money, banking and financial
market, F. Mishkin, 11th edition
Chapter 11, Monetary and Financial Theories, Nhi C.Y & Tuan D.A,
(2016)
Chapter 19, Testbank The Economics of Money, banking and
Financial Market, Kelly K & Stahl R.G 9th edition

1
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1.1 Quantity theory of money


Explains how the nominal value of aggregate income affects the
demand for money.

1.1 Quantity theory of money


1. Equation of exchange
Velocity of money (V): explain the relationship between aggregate
nominal income (total amount of spending on final goods and
services) and money supply.
×
=

P: Price level Y: aggregate output M: Money supply


Meaning of V:

1.1 Quantity theory of money


1. Equation of exchange
Equation of exchange:
M x V = P x Y
Determinants of Velocity

2
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1.1 Quantity theory of money


1. Equation of exchange
Demand for money:

 = ×

 = ×
Money market in equilibrium  MD=MS
 = ×

1.1 Quantity theory of money


2. The quantity theory of money
Fisher’s view: V is constant
× = ×

1.1 Quantity theory of money


2. The quantity theory of money
Price level and quantity theory:
Y is constant at the full-employment level
×
=

3
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1.1 Quantity theory of money


2. The quantity theory of money
Inflation and quantity theory:
%∆ + %∆ = %∆ + %∆
↔ %∆ = %∆ + %∆ − %∆
Because %∆V ≈ 0  = %∆ = %∆ − %∆

10

1.1 Quantity theory of money


2. The quantity theory of money
Evidence of the quantity theory of money
In the long run

Sources: For panel (a), Milton Friedman and Anna Schwartz, Monetary Trends in the United States and the United Kingdom: Their
Relation to Income, Prices, and Interest Rates, 1867–1975; Federal Reserve Bank of St. Louis, FRED database: http://research.stlouisfed
.org/fred2/. For panel (b), International Financial Statistics. International Monetary Fund, http://www.imfstatistics.org/imf/.

11

1.1 Quantity
theory of money
2. The quantity
theory of money
Evidence of the quantity theory of
money

In the short run

12

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1.2 Keynesian theories of money


demand
Liquidity Preference Theory: 3 motives affect demand for money:

Transaction Motive

Precautionary Motive

Speculative motive

13

1.2 Keynesian theories of money


demand
Putting 3 motive together:

= ,
-+
Velocity:

= =
,

14

1.3 The modern M. Friedman’s


quantity theory of money
Base on the theory of portfolio choice:
◦ Wealth
◦ Return
◦ Risk
◦ Liquidity

15

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1.3 The modern M. Friedman’s


quantity theory of money
The demand for money function:

= ( , − , − , − )
+ _ _ _
Where:
◦ Md/P: Demand for real money
◦ Yp: wealth (permanent income)
◦ rm: Expected return on money
◦ rb: Expected return on bonds
◦ re: Expected return on equity (common stock)
◦ πe: Expected inflation rate

16

1.3 The modern M. Friedman’s


quantity theory of money
Distinguish between Friedmand and Keynes theories
Keynes theory Friedman theory
Types of assets Money and bonds Many assets (money, bonds,
equities, goods)
Money and goods Does not mention. Substitutes
Expected return on money Constant (=0) Change when interest rate
change
Differences between return on money Rise when interest rate rise Quite constant (changes with
and return on other assets small amount)
Role of interest rate in the demand for Important Have little effect
money
Stable of the demand for money Unstable Stable
function

17

Empirical Evidence for the


demand for money
- Is the demand for money sensitive to change in interest rates?
Quantity theory of money Keynes view’s
Interest rate Does not affect the Play an important role in
demand for money the demand for money
Velocity Predictable Unpredictable

18

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Empirical Evidence for the


demand for money
- Is the demand for money sensitive to change in interest rates?
- Is the demand for money function stable overtime?

19

Thank you!

20

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