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U.S. President Nixon abandoned the gold standard in 1971



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U.S. President Nixon abandoned the gold standard in 1971





  • Eventually 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)


the interest rate decreases money demand


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).


  1. Assume Ms is amount of money supplied in the economy. It is

influenced by the Central Bank. Ms is constant


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