Economics: Money and Its Demand

The higher the average price of goods and services, the more money people need to buy the same amount of goods and services.

When people have more income, they buy more goods and services, which increases the demand for money.

The aggregate demand for money is determined by the price level, real national income, and interest rates.

The aggregate demand for money is the total amount of money that people want to hold, expressed in real terms.

The relationship between the interest rate and the amount of money people want to hold is inverse. As interest rates fall, people demand more money.

The money market is a place where liquid assets (like money) are lent and borrowed.

Domestic interest rates influence the return on domestic currency deposits in foreign exchange markets.

Monetary assets in the money market generally have lower interest rates compared to other investments like bonds, loans, and deposits in foreign exchange markets.

The amount of money in circulation within an economy. It includes currency and other forms of liquid assets like checking accounts.

The desire of individuals and institutions to hold monetary assets, such as cash or checking accounts, instead of illiquid assets that might earn a higher return.

The interest rate that could have been earned on illiquid assets if the money was not held as a monetary asset.

The rate at which the price of transactions changes over time. It can affect the demand for money because people may want to hold more money if prices are rising quickly.

The ease and speed with which an asset can be converted into cash without significant loss of value. Monetary assets typically have higher liquidity than illiquid assets like real estate.

The potential loss or gain that could occur from holding an asset. It's a key factor influencing the demand for money, as inflation introduces risk to the value of money.

The amount of goods and services that can be purchased with a given amount of money. It's affected by inflation, as rising prices decrease the purchasing power of money.

This refers to the increased need for money due to higher transaction costs or prices, or a greater volume of transactions in an economy.

A state where the quantity of real monetary assets supplied (Ms/P) equals the quantity demanded (L(R,Y)), resulting in no excess supply or demand. The model represents the equilibrium interest rate (R) where money supply and demand balance.

The demand for real money balances is a function of the interest rate (R) and real income (Y). It represents the amount of real money people want to hold at different interest rates and income levels.

Refers to the supply of real monetary assets in an economy, represented as the nominal money supply (Ms) divided by the price level (P).

The interest rate at which the real money supply (Ms/P) equals the real money demand (L(R,Y)) in the money market.

An increase in the money supply (Ms) for given price (P) and real income (Y) levels leads to a decrease in the equilibrium interest rate. This is because a greater money supply leads to lower demand for borrowing.

A rise in real income (Y), for a given real money supply (Ms/P), increases the equilibrium interest rate. This is because higher income increases demand for money, pushing up interest rates to clear the market.

The situation where both the money market and the foreign exchange market are in equilibrium simultaneously. This occurs when the interest rate and exchange rate are such that money supply equals money demand and the interest parity condition holds.

The link between the money market and the foreign exchange market. Monetary policy actions by the Fed affect the U.S. interest rate, which impacts the dollar/euro exchange rate. The ECB can also affect the exchange rate by adjusting the European money supply and interest rate.

An increase in a country's money supply leads to a decrease in interest rates, a decline in the rate of return on domestic currency deposits, and a depreciation of the domestic currency.

A decrease in a country's money supply leads to an increase in interest rates, a rise in the rate of return on domestic currency deposits, and an appreciation of the domestic currency.

An increase in the supply of euros causes a depreciation of the euro (meaning the dollar appreciates).

A decrease in the supply of euros causes an appreciation of the euro (meaning the dollar depreciates).

An increase in the supply of euros leads to a decrease in the expected rate of return on euro deposits, making the dollar appreciate against the euro.

The analysis of how changes in the money supply affect the exchange rate is a short-run analysis, as it assumes that prices don't change significantly in the short term.

The total amount of money people want to hold, adjusted for inflation.

The impact of changes in the money supply on interest rates and exchange rates in the short-term.

When an increase in the money supply lowers domestic interest rates, making domestic currency less attractive, leading to a depreciation of the domestic currency.

The long-term effects of changes in the money supply on the economy, where prices adjust proportionally and real variables like income and interest rates remain unaffected.

The immediate response of the exchange rate to a change in the money supply, which is greater than its long-term adjustment.

The tendency for the exchange rate to be more volatile than other economic variables due to the overshooting effect.

The period of time where prices adjust proportionally to a change in the money supply, implying that inflation expectations are also adjusted.

A permanent increase in a country's money supply leads to a proportional depreciation of its currency in the long run. However, the initial depreciation is larger than the eventual long-run depreciation. This difference in depreciation over time creates an overshooting effect.

Expected inflation influences exchange rate movements in the long run. When individuals anticipate higher inflation in a country, they tend to sell that country's currency, resulting in its depreciation. However, changes in inflation expectations often precede actual price adjustments.

Monetary policy changes directly affect interest rates, but these changes may haven't impacted prices or inflation expectations yet. This can lead to exchange rate overshooting

The exchange rate's volatility can be explained by the phenomenon of overshooting. Overshooting occurs when unexpected changes in monetary policy temporarily cause larger exchange rate adjustments than expected.

The demand for money is influenced by the need for liquidity, which in turn is affected by prices and income. When prices rise, people need more money for transactions.

The level of real output, or real national income, influences the demand for money. When output increases, people have more income and therefore need more money for transactions.

Interest rate plays a crucial role in determining the supply of money. Monetary policymakers adjust interest rates to influence the amount of money available in the economy. High interest rates can discourage borrowing and reduce the supply of money.