Money,Inflation,andInterestRates-ComingSoon.pdfVIP

Money, Inflation, and Interest Rates Module Objectives ? Know what money is ? Know what the demand for money depends on ? Know the major cause of inflation ? Know how the inflation rate, the real interest rate, and the nominal interest are related Consumer Prices January 1950 = 1.0 18.9 (logarithmic scale) United Kingdom Japan 7.8 6.8 USA 3.9 Germany 1.0 50 55 60 65 70 75 80 85 90 95 (c) Copyright 1998 by Douglas H. Joines 1 Money ? Functions – medium of exchange – store of value – unit of account ? Money is an asset that is generally accepted as a means of payment Money Demand ? Money demand depends on – volume of transactions – opportunity cost of holding money – cost of shifting between money and other assets ? Demand is for real money balances ? Simple money demand function M/P = kY Classical Dichotomy A G T M Real Monetary Sector ? Sector Y r L w P i E (c) Copyright 1998 by Douglas H. Joines 2 Money Market Clearing ? For now, assume k is constant ? Assume government controls M ? E