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Chapter 15: Money, Interest Rates, and Exchange Rates - Coggle Diagram
Chapter 15: Money, Interest Rates, and Exchange Rates
Money
Money is an asset used to make payments for goods, services, or to repay debt.
It is considered a liquid asset, meaning it can be used easily and quickly without significant transaction costs.
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Illiquid (non-monetary) assets require time and transaction costs to convert into money but typically offer higher returns.
Money Supply (M1=total amount of currency and checking deposits held by the households and the firms)
The central bank controls the total amount of money circulating in the economy — known as the money supply.
Money demand is the amount of liquid monetary assets people want to hold instead of converting them into higher-yielding, illiquid assets.
It is influenced by
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Liquidity
Individuals & Institutions: Money is held because it's the most liquid asset — easy to use for everyday purchases. If spending or transactions increase, the need for liquidity (money) also increases.
AD: Higher income → more purchases → greater need for money to complete transactions → higher money demand.
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