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The Role of Money

Real Cash Balances.  Related to Aggregate Demand.

No issue in economics is less settled than the demand for money.

The Unique Nature of Money

In an exchange economy,

What is money?

Types of Money

What is the price of money?

1, P, R, E.

The Supply of Money

The supply of money is a noncontroversial institutional detail.

expanded discussion

The Demand for Money

expanded discussion

Views

The Classical View

Y is determined by real factors of production.  P adjusts to achieve equilibrium in the supply and demand for money.  R plays no role in the analysis.  This produces the aggregate demand curve.

The Keynesian View

Now, M V(R) = P Y.

The LM Curve traces out combinations of Y and R that are consistent with equilibrium in the supply and demand for money.  P is fixed in the short run.

The Monetarist View

Velocity is a stable function of interest rates.  In the short run, Y adjusts.  In the long run, P adjusts.


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