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CH 8: monetary policy, nominal IR vs real IR nominal IR refers to the…

- - - - 2. precautionary purposes
        money held as a precaution for unexpected items of expenditure e.g. sickness or accidents
        more will be held if income rises
      - 3. speculative purposes
        money held instead of investing it in bonds or other assets
        more will be held if the interest rate is low or other assets is expected to fall
      - 1. transactionary purposes:
        money needed to facilitate payment for daily transactions of goods and services
        more is needed if income rises, if prices rise, if we use credit cards and cheques less often or if we are paid less regularly
      - demand for money refers to the preference to hold money as cash
        
        supply of money (MS) is exogenously determined by the central bank in the economy, independent of the level of interest rate
        
        the interaction between the LP and MS gives the market equilibrium level of interest rate and quantity of money
        
        factors influence the demand of money
        
        (c) changes in government expenditure
        
        leads to an increase in income and transactionary demand for money, hence causing IR to rise.
        
        however, crowding out effect. - the increase in government spending leads to rising costs of borrowing for the private sector and hence 'crowds out' private investment. (社会的财富是一定的，所以政府使用的多，private可以使用的就会变少。) as gov are typically non-profit-driven, they are not strictly subject to market forces, they are likely to be less efficient than private enterprises and resulting in less allocative efficiency in the economy
        
        (b) economic growth
        
        an increase in income will lead to an increase in the transactionary demand for money, resulting in a rightward shift of the LP hence an increase in the IR.
        
        (a) business and consumer expectations
        
        pessimistic outlook may cause consumers to reduce spending, hence reducing the transactionary demand for money and causing a fall in IR.
        
        as ppl expect IR to fall in the future fur to the negative outlook, causes ppl to reduce their speculative demand (意思是人们为了抓住或者不错过有利的购买证券的机会而持有的一定money) for money and ppl will hold more bonds instead.
        
        this results in a leftward shift of the LP, hence the IR will fall.
        
        (d) expectation of changes in the exchange rate
        
        if foreigners believe the currency is likely to appreciate in the future, they will want to hold dollars until it does appreciate.
        
        This increases its demand. an upward pressure for the gov to increase its supply. - fall in IR.
        
        (e) openness of the economy
        
        restrict the ability of the government to influence the domestic IR, as inflow and outflow of the money form and to other countries affect the domestic money supply and demand.
- - - - indirect transmission mechanism:
        changes in the money supply affect the IR and investment
        (1) MS increases, IR fall, cost of borrowing falls, investment increases, movement along MEI, AD rises, full employment, GDP no change
        (2) ... below full employment, GDP increases
        (3) liquidity trap, no change in I, no change in AD, no change in GDP
      - direct transmission mechanism
        
        change in MS change AD directly
        
        increase in the demand for both financial assets and other real assets