Theories of Money Demand (Chapter 20)

Baumol-Tobin Model - N equation

Baubol-Tobin Model - Money demand equation

Quantity Theory of Money - Equation of exchange

MV = PY

Quantity theory of money - What happens if people often use credit cards? (PY constant)

M falls so V increases

Quantity theory of money - What happens if people often use debit cards? (PY constant)

M increases so V falls

Quantity Theory - inflation formula

Cambridge Money Demand - equation for money demand

Keynes Liquidity Preference

Motives for holding money

• Transactions demand: $ to carry out transactions

• Precautionary demand: people hold $ as a buffer to cover unexpected expenses or emergencies

• Speculative demand: people hold $ to take advantage of potential future changes in interest rates or bond prices

During recessions the velocity of money tends to

decrease

During periods of economic growth velocity of money tends to

increase