Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could NOT be treated as a constant?
What will be an ideal response?
Keynes believed the demand for money depended on income and interest rates. Money was held to facilitate normal transactions and as a precaution for unexpected transactions. For both of these motives, money demand depended on income. People also held money as an asset, for speculative purposes. The speculative motive depends on income and interest rates. People hold more money for speculative purposes when they expect bond prices to fall, generating a negative return on bonds. Since money demand varies with interest rates, velocity changes when interest rates change. Also, since money demand depends upon expectations about future interest rates, unstable expectations can make money demand, and thus velocity, unstable.
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When aggregate demand increases, there is a movement ________ along the AS curve and ________
A) up; an upward shift of the short-run Phillips curve B) down; a movement down along the short-run Phillips curve C) up; a movement up along the short-run Phillips curve D) up; a movement down along the short-run Phillips curve E) down; a downward shift of the short-run Phillips curve
Figure 4-5
If the suppliers of a good will sell any amount at $30 but there are no sales, then the market can best be represented by which graph in Figure 4-5?
a.
1
b.
2
c.
3
d.
4