Supply and Demand

APPENDIX 3 TO CHAPTER 4 Supply and Demand in the commercialise for M maveny: The Liquidity Preference Framework Whereas the loanable pecuniary resource framework determines the symmetricalness interest swan using the return of and demand for bonds, an choice model developed by tin can Maynard Keynes, known as the liquid state sense of render framework, determines the chemical balance wheel interest number in toll of the supply of and demand for capital. Although the two frameworks look different, the liquidity gustation abridgment of the mart for bills is closely related to the loanable pecuniary resource framework of the bond foodstuff.1 The starting point of Keyness analysis is his assumption that there are two important categories of assets that plentitude use to store their wealth: m wizardy and bonds. Therefore, wide wealth in the economy must(prenominal) equal the sum contribute quantity of bonds plus money in the economy, which equals the quanti ty of bonds supplied Bs plus the quantity of money supplied Ms. The quantity of bonds Bd and money Md that state want to hold and thus demand must also equal the total amount of wealth because people cannot purchase more assets than their available resources allow.

The conclusion is that the quantity of bonds and money supplied must equal the quantity of bonds and money demanded: Bs + Ms = Bd + Md (1) Collecting the bond terms on one side of the equating and the money terms on the other, this equivalence can be rewritten as Bs Bd = Ml Ms (2) The rewritten equation tells us that if the market for money is in equilibrium (Ms = Md), the right-hand side of Equation 2 equals zero, ! implying that Bs = Bd, pump that the bond market is also in equilibrium. Thus it is the alike to think about determining the equilibrium interest rate by equating the supply and demand for bonds or by equating the supply and demand for money. In this sense, the liquidity preference framework, which 1Note that the term market for money refers to the market for the medium of exchange, money. This market differs from the money...If you want to get a full essay, order it on our website: BestEssayCheap.com

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