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Quantity Theory of Money Demand

Quantity Theory of Money Demand. Economics 330, Handout of December 4, 2006. Relation of Velocity to Standard Money Demand equation. Equilibrium in the Market for Money: The LM Curve. Demand for money called liquidity preference M d /P depends on income ( Y ) and interest rates ( i )

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Quantity Theory of Money Demand

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  1. Quantity Theory of Money Demand Economics 330, Handout of December 4, 2006

  2. Relation of Velocity to Standard Money Demand equation

  3. Equilibrium in the Market for Money: The LM Curve • Demand for money called liquidity preference • Md/P depends on income (Y) and interest rates (i) • Positively related to income • Raises the level of transactions • Increases wealth • Negatively related to interest rates

  4. Equilibrium in the Market for Money: The LM Curve (cont’d) • Connects points that satisfy the equilibrium condition that MD = MS • For each level of aggregate output, the LM curve tells us what the interest rate must be for equilibrium to occur • The economy tends to move toward points on the LM curve

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