Macroeconomics by O' Blanchard

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Macroeconomics by O. Blanchard

• Chapter 4 Financial markets

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Learning Objectives

• The demand for money
• The supply for money
• The Fed and the interest rate

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Money definition

• Money is the stock of assets that can be readily
  used to make transactions.

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The money demand function

• Money is used to make transactions
• Money is a portfolio decision
• Therefore MdYL(i)

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Money Demand
r interest rate

L (r )
M/P real money balances
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Changes in money demand

• Shift the money demand curve

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Money Supply
r interest rate

M/P real money balances
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Equilibrium
r interest rate
r1
L (r )
M/P real money balances
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The Theory of Liquidity Preference

• A simple theory in which the interest rate is
  determined by money supply and money demand.

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Open market operations

• definition The purchase or sale of government
  bonds by the Federal Reserve.
• how it works

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How the Fed raises the interest rate
r interest rate
r2
r1
L (r )
M/P real money balances
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What banks do

• Reserves (R ) the portion of deposits that
  banks have not lent.
• To a bank, liabilities include deposits,
• assets include reserves and outstanding loans
• Fractional-reserve banking a system in which
  banks hold a fraction of their deposits as
  reserves.

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Fed Funds

• The Fed funds market and the Fed funds rate

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The money multiplier

• Understanding the money multiplier example
• The money multiplier and the monetary base