Goods market
U.S. President Nixon abandoned the gold standard in 1971
Download 1.05 Mb.
|
U.S. President Nixon abandoned the gold standard in 1971Eventually dollar came to be known as the ‘reserve currency’, replacing pound. Because fiat money is not tied to gold, it is subject to the effects of inflation 1. Money Demand (Md): amount of money people want to hold depends on demand for transaction, and the interest rate Md = L (Y, r) A rise in nominal income increases money demand, while a rise in the interest rate decreases money demand Why? If interest rate is high, the individual is better off earning interest by keeping the money in bank, and vice versa • When Y increases, demand for money also increases • => increase in nominal income, shifts Md curve right It is downward sloping because of the negative relationship with interest rates, and interest rate changes leads to moves along the demand curve (not shifts). Assume Ms is amount of money supplied in the economy. It is influenced by the Central Bank. Ms is constant Download 1.05 Mb. Share with your friends:
|