Slide 14-1

Copyright © 2003 Pearson Education, Inc.

Q2

1'

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Figure 14-5: Effect on the Interest Rate of a Rise in Real Income

L(R,Y1)L(R,Y2)

Increase inreal income

Real money supply

MS

P( = Q1)

R2 2

R1 1

Interest rate, R

Real moneyholdings

Slide 14-2

Copyright © 2003 Pearson Education, Inc.

Output and the Interest Rate• An increase (fall) in real output raises (lowers) the

interest rate, given the price level and the money supply.

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Slide 14-3

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The Money Supply and the Exchange Rate in the Short Run

Short run analysis• The price level and the real output are given.

Long run analysis• The price level is perfectly flexible and always

adjusted immediately to preserve full employment.

Slide 14-4

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模型目的。內生變數：決定模型兩軸。行為法則：畫出模型曲線。均衡：決定均衡之內生變數。外生衝擊

• 判斷是否為外生變數改變？• 判斷此外生變數之改變將影響哪些行為法則？• 判斷此外生變數之改變造成行為法則何種影響？

學習經濟模型五步驟模型目的。

Slide 14-5

Copyright © 2003 Pearson Education, Inc.

Linking Money, the Interest Rate, and the Exchange Rate• The U.S. money market determines the dollar interest

rate, which in turn affects the exchange rate that maintains the interest parity.

– Figure 14-6 links the U.S. money market (bottom) and the foreign exchange market (top).

The Money Supply and the Exchange Rate in the Short Run

Slide 14-6

Copyright © 2003 Pearson Education, Inc.

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Figure 14-6: Simultaneous Equilibrium in the U.S. Money Market and the Foreign-Exchange Market

Return on dollar deposits

Expectedreturn oneuro deposits

L(R$, YUS)

E1$/€

1'

R1$

1U.S. realmoneysupply

MSUS

PUS

Rates of return(in dollar terms)

Dollar/euro exchange Rate, E$/€

0

Foreignexchangemarket

U.S. real money holdings

(increasing)

Moneymarket

Slide 14-7

Copyright © 2003 Pearson Education, Inc.

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Figure 14-7: Money-Market/Exchange Rate Linkages

European money market

United Statesmoney market

EuropeEuropean System

of Central Banks

United StatesFederal Reserve System

(United Statesmoney supply)

MSUS MS

E(European money supply)

R$

(Dollar interest rate)R€

(Euro interest rate)

Foreignexchange

market

E$/€

(Dollar/Euro exchange rate)

Slide 14-8

Copyright © 2003 Pearson Education, Inc.

模型目的。內生變數：決定模型兩軸。行為法則：畫出模型曲線。均衡：決定均衡之內生變數。外生衝擊

• 判斷是否為外生變數改變？• 判斷此外生變數之改變將影響哪些行為法則？• 判斷此外生變數之改變造成行為法則何種影響？

學習經濟模型五步驟

外生衝擊

Slide 14-9

Copyright © 2003 Pearson Education, Inc.

Expectedreturn oneuro deposits

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Figure 14-8: Effect on the Dollar/Euro Exchange Rate and Dollar Interest Rate of an Increase in the U.S. Money Supply

E2$/€ 2'

U.S. real money holdings

Rates of return(in dollar terms)

Dollar/euro exchange Rate, E$/€

0

Return on dollar deposits

L(R$, YUS)

E1$/€

1'

R1$

1

M1US

PUS

R2$

2

Increase in U.S.real money supplyM2

US

PUS

Slide 14-10

Copyright © 2003 Pearson Education, Inc.

Expectedreturn oneuro deposits

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand

Figure 14-8: Effect on the Dollar/Euro Exchange Rate and Dollar Interest Rate of an Increase in the U.S. Money Supply

E2$/€ 2'

U.S. real money holdings

Rates of return(in dollar terms)

Dollar/euro exchange Rate, E$/€

0

Return on dollar deposits

L(R$, YUS)

E1$/€

1'

R1$

1

M1US

PUS

R2$

2

Increase in U.S.real money supplyM2

US

PUS

Slide 14-11

Copyright © 2003 Pearson Education, Inc.

U.S. Money Supply and the Dollar/Euro Exchange Rate• What happens when the Federal Reserve changes the

U.S. money supply?– An increase (decrease) in a country’s money supply

causes its currency to depreciate (appreciate) in the foreign exchange market.

The Equilibrium Interest Rate: The Interaction of Money Supply and Demand