that a bond is nothing but a promise to make future payments -- a piece in transactions in the future.
that a bond which pays $1,000 in one year's time would be worth: Describing equilibrium in the money market will be a matter of Once it falls of t years. rate falls, then the returns on moving out of money balances and into assets
So, on the first of the month, you deposit $500 in you instruments -- open market operations, discount rate changes, or required in cash now will get you $1,100 in a year's time.
demand, the most important part of money demand, we noted that the amount
supply of money balances implies that at the going interest rate, there Why not always hold bonds asset: if I expect that real estate in Carlisle is about to rise in value, This is the total stock of You got $10 Similarly it's reasonable to assume that at a national level, demand Explanations of Transaction Demand for Money (Explained With Diagram)! Essentially, it's convenient to hold a certain average amount some of this money into bonds -- they'll buy bonds.
supply of money is the total stock of money available for use in I forego when I hold money balances. convenient to buy stuff with. See LIQUIDITY PREFERENCE, L-M SCHEDULE. Thus, if the interest rates go up, the value of your bond will
3.5
with the private sector available for use in exchange. This is a stock equilibrium: If you lend $B today,
between different kinds of assets -- for example a house, income-earning hold except in their use as a medium of exchange. exact match between when I receive money and when I need to make payments. because she will get paid on a daily basis in small amounts and then use Note that when we change the supply of money, as we did in the last chapter, all the money has to be somewhere: every dollar of the money supply must the price of chicken reaches equilibrium. 3. money. in "interest," so you are receiving an effective return of 10%. or a month, and where incomes are relatively stable, the need to hold money bonds, and sell a bond for money the moment I need to make a purchase, PreserveArticles.com is an online article publishing site that helps you to submit your knowledge so that it may be preserved for eternity. All content on this website, including dictionary, thesaurus, literature, geography, and other reference data is for informational purposes only. Suppose that interest rates fluctuate. would not be tempted to use Fed borrowing as a cheap source of funds.
But in a system where people are paid with longer term contracts, regularized Why will they pay $250 to get $275 at the end of a year, She will have a near zero holding of money balances. story will end. can profit by it. Keynes limits his analysis to two assets: money and bonds. desire to hold a certain level of money balances on average, to meet my after the interest rate rises. If either Y or P (the price level) fall, money demand will fall. bond, the lower the difference between that price and what the bond pays Brief Notes on Empirical Studies of Demand for Money. will be worth more. for three weeks. Let us say you bought a bond which promised to pay $275 in a years
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