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CH 5 MBF
CH 5 MBF
Chapter 5
Motivation
5-22
What
happened
here?
Loanable Funds - Use of Funds Approach
1. Demand for
bonds = supply
of loanable
funds
2. Supply of bonds
= demand for
loanable funds
Liquidity Preference Framework
• proposed by John Maynard
Keynes.
• from the perspective of
‘money’
• assume there are 2 assets:
bond + money = total wealth
25
The Liquidity Preference Framework
◼ two assets: bonds + money = total wealth
◼ supply side: Ms + Bs = Wealth
◼ demand side: Bd + Md = Wealth
➔ Ms + Bs = Bd + Md
Re-arranging:
➔ Ms – Md = Bd – Bs
M d - Ms
Conclusion:
If money market is in equilibrium (money
demand equals money supply: Md = Ms ), then
bond market is also in equilibrium (bond
demand equals bond supply: Bd = Bs).
Keynesian Liquidity Preference Analysis
Derivation of Demand Curve
• As i , the opportunity cost of holding money
Md . The demand curve for money has the
usual downward slope
Market Equilibrium
• Occurs when Md = Ms
Equilibrium in the Market for Money
Market equilibrium
• equilibrium quantity of money: Md = Ms
• equilibrium interest rate: i*