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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