Notesale: Turn your study into money

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Seminar 3 – Statements
Every financial market channels finds from lenders-savers to borrowers-spenders
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Direct finance is when there is no
intermediaries in between
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Securities are assets for the person who buys them but are liabilities for the individual or firm that issues
them
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When I purchase stock, I own a portion of a firm and have the right to vote on issues important to the firm
and to elect its directors
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Because the quantity theory of money tells us how much money is held for a given amount of aggregate
income, it is also a theory of the demand for money
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If the money supply is £500 and nominal income is £4,000, the velocity of money is 20
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In the equation of exchange, the concept that provides the link between M and PY is called the velocity of
money
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Fisher’s quantity theory of money suggests that the demand for money is purely a function of income, and
interest rates have no effect on the demand for money
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Keynes argued that the transactions component of the demand for money was primarily determined by the
level of people's transactions, which he believed were proportional to income
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the transactions motive
B
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the speculative motive
D
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So we want to
hold more bonds than money
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The Keynesian demand for real balances can be expressed as Md/P = f(i,Y)
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What motives did Keynes think determined money
demand? What are the two reasons why Keynes thought velocity could NOT be treated as a constant?
A
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Money was held to facilitate normal transactions and as a precaution for unexpected transactions
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People also held money as an assed, for speculative purposes
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People hold more money for speculation purposes when they expect bond prices to fall,
generating a negative return on bonds
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Also, since money demand depends upon expectations about future interest rates,
unstable expectations can make money demand, and thus velocity, unstable
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The price level will quadruple
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The 4 factors:
-interest rates (decreases in interest rates increase money demand)
-wealth (higher wealth leads to higher money demand)
-risk of alternative assets (a higher risk of alternative assets increases money demand)
-liquidity of other assets (a decrease in liquidity of alternative assets increases the demand for money)
Calculate what happens to nominal GDP if velocity remains constant at 4 and the money supply increases
from $250 billion to $375 billion
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After the money supply increases, nominal GDP is $1
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What happens to nominal GDP if the money supply grows by 20% but velocity declines by 30%?
Nominal GDP declines by approximately 10%
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Velocity is unpredictable because interest rates, which have large fluctuations affect the demand for money
and hence velocity
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Keynes
thought that these expectations moved unpredictably, meaning that money demand and velocity are also
unpredictable

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