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Money, Interest Rates, and Exchange Rates

Slides prepared by Thomas BishopChapter 14 money , InterestRates, andExchange RatesCopyright 2006 Pearson Addison-Wesley. All rights What is money ? Control of the supply of money The demand for money A model of real money balances andinterest Rates A model of real money balances, interestrates and Exchange Rates Long run effects of changes in money onprices, Interest Rates and Exchange ratesCopyright 2006 Pearson Addison-Wesley. All rights Is money ? money is an asset that is widely used andaccepted as a means of payment. Different groups of assets may be classified asmoney. Currency and checking accounts form a usefuldefinition of money , but the large Interest -bearingbank deposits traded in the foreign exchangemarket are excluded from this 2006 Pearson Addison-Wesley.

The Money Market (cont.) • When there is an excess supply of money, there is, correspondingly, an excess demand for alternative, interest-bearing assets. ♦People holding excessive money balances are willing to acquire interest bearing assets (by buying them with money) at a lower interest rate. ♦Potential money holders are more willing to ...

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