TAILIEUCHUNG - The economics of Money, Banking and Financial Markets Part 10

Ch a p ter 22 The Demand for Money. In earlier chapters, we spent a lot of time and effort learning what the money supply is, how it is determined, and what role the Federal Reserve System plays in it | Part VI Monetary Theory Chapter 22 The Demand for Money PREVIEW In earlier chapters we spent a lot of time and effort learning what the money supply is how it is determined and what role the Federal Reserve System plays in it. Now we are ready to explore the role of the money supply in determining the price level and total production of goods and services aggregate output in the economy. The study of the effect of money on the economy is called monetary theory and we examine this branch of economics in the chapters of Part VI. When economists mention supply the word demand is sure to follow and the discussion of money is no exception. The supply of money is an essential building block in understanding how monetary policy affects the economy because it suggests the factors that influence the quantity of money in the economy. Not surprisingly another essential part of monetary theory is the demand for money. This chapter describes how the theories of the demand for money have evolved. We begin with the classical theories refined at the start of the twentieth century by economists such as Irving Fisher Alfred Marshall and A. C. Pigou then we move on to the Keynesian theories of the demand for money. We end with Milton Friedmans modern quantity theory. A central question in monetary theory is whether or to what extent the quantity of money demanded is affected by changes in interest rates. Because this issue is crucial to how we view moneys effects on aggregate economic activity we focus on the role of interest rates in the demand for Quantity Theory of Money Developed by the classical economists in the nineteenth and early twentieth centuries the quantity theory of money is a theory of how the nominal value of aggregate income is determined. Because it also tells us how much money is held for a given amount of aggregate income it is also a theory of the demand for money. The most important feature of this theory is that it suggests that interest rates have no

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