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CHAPTER 22
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand for Money
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 2
The Transactions Motive
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 3
The Transactions Motive
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 5
Money Management
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 6
Money Management
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 7
The Optimal Balance
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 8
The Speculation Motive
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 9
The Speculation Motive
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Transactions Volume and
the Level of Output
• When output (income)
rises, the total number
of transactions rises,
and the demand for
money curve shifts to
the right.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 13
Transactions Volume and
the Price Level
• When the price level
rises, the average
dollar amount of each
transaction rises; thus,
the quantity of money
needed to engage in
transactions rises, and
the demand for money
curve shifts to the right.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 14
The Determinants of Money Demand
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 16
The Equilibrium Interest Rate
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The Equilibrium Interest Rate
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 18
Changing the Money Supply
to Affect the Interest Rate
• An increase in the supply
of money lowers the rate
of interest.
• To expand the money
supply the fed can reduce
the reserve requirement,
cut the discount rate, or
buy U.S. government
securities in the open
market.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 19
Increases in Y and Shifts in
the Money Demand Curve
• An increase in aggregate
output (income) shifts the
money demand curve,
which raises the
equilibrium interest rate
from 7 percent to 14
percent.
• An increase in the price
level has the same effect.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 20
The Federal Reserve and
Monetary Policy
• Tight monetary policy refers to Fed
policies that contract the money
supply in an effort to restrain the
economy.
• Easy monetary policy refers to Fed
policies that expand the money
supply in an effort to stimulate the
economy.
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair 21