文档介绍：Chapter 4: Money Market Analysis
Gang Gong
March 10, 2002
Copyright Notes:This electronic file is only used as a lecture notes for the student in this class. It is not allowed to be used for presentation anywhere else without the permission from the author.
Introduction
The objective of this chapter is to study how money and interest rate is determined in the money and financial market.
The money and financial market is the market in which money and various financial assets (such as, bonds and stocks) are exchanged.
Introduction
The Functions of Money
Medium of Exchange
Store of Value
Unit of Account
Introduction
Types of Money in Modern Economy with Banking System:
M1:
Currency and Notes (issued by central bank), also called high powered money or ary base.
checkable deposit.
M2: Non-checkable saving deposit etc.
M3: Large time deposit
Note: M1 is the most liquid money followed by M2 and M3.
The Demand for Money
Transaction Demand for Money:
— Money is an medium of transaction. The transaction demand for money is those money that is hold for transactionary purpose. It is assumed to be related to nominal GDP.
The Demand for Money
Asset Demand for Money
Money is also an asset. However, unlike the other assets, such as bonds, stocks, etc., money (M1) does not generate interest rate (its only advantage is the liquid). Therefore it can be expected that when interest rate of other assets increase, the demand for money will decline.
The Demand for Money
The Total Demand for Money
The total demand for money is the sum of transaction demand for money and asset demand for money. We thus can write the demand function for money as

(see Figure presented in class)
The Supply of Money and Money Market Equilibrium
The supply of money is often assumed to be controlled by the central bank, and therefore it is exogenuous:
The Supply of Money and Money Market Equilibrium
The Money Market Equilibrium is the condition at which
Therefore, given the money supply a