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Keynesian Liquidity Effect... tell me if i understand if correctly...

G

gopunk

Lifer
basically, when money supply increases suddenly, for the short run...

prices are constant (not enough time to change)
demand for money increases
interest rates fall, to balance supply and demand of money

is that right? if so, why does the demand for money increase?
 
Possibly because the interest rate fell. With lower interest rates it's not as tempting to invest, but it is more tempting to borrow.
 


<< Possibly because the interest rate fell. With lower interest rates it's not as tempting to invest, but it is more tempting to borrow. >>



hmm, if demand increases because interest rates fall, then what causes the interest rates to fall?
 
A sudden increase in demand for cash is caused by the increased amount of money available for the consumer to use, causing the consumer to seek out cash to purchase goods.
 
I think the interest rates fell because the Federal Reserve banks don't want to sit on the latest shipment of cash from the Treasury. They want to attract people to borrow it, so they can start making a profit on it.
 
i see... so basically the consumers want to borrow money to purchase goods, because the money is available to be lent.... talk about weird... 😉

thanks guys
 
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