lectures in macroeconomics- charles w. upton the basics of the demand for money
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![Page 1: Lectures in Macroeconomics- Charles W. Upton The Basics of the Demand for Money](https://reader030.vdocument.in/reader030/viewer/2022032521/56649d575503460f94a36355/html5/thumbnails/1.jpg)
Lectures in Macroeconomics- Charles W. Upton
The Basics of the Demand for Money
Alternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips
Five Trips
Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Earnings $ 0.360 $ 0.435 $ 0.420 $ 0.285
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The Basics of the Demand for Money
2
A Simple Example
• $100 a week income
• Plan to Spend $10 a day (Monday to Sunday)
• Interest Rate 0.15% per day
• Cost of each bank transaction (both bank charge and shoe leather charge) is 6¢
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The Basics of the Demand for Money
3
Four Strategies
Alternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips
Five Trips
Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Earnings $ 0.360 $ 0.435 $ 0.420 $ 0.285
![Page 4: Lectures in Macroeconomics- Charles W. Upton The Basics of the Demand for Money](https://reader030.vdocument.in/reader030/viewer/2022032521/56649d575503460f94a36355/html5/thumbnails/4.jpg)
The Basics of the Demand for Money
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Four StrategiesAlternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips Five Trips Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Earnings $ 0.360 $ 0.435 $ 0.420 $ 0.285
![Page 5: Lectures in Macroeconomics- Charles W. Upton The Basics of the Demand for Money](https://reader030.vdocument.in/reader030/viewer/2022032521/56649d575503460f94a36355/html5/thumbnails/5.jpg)
The Basics of the Demand for Money
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Four StrategiesAlternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips Five Trips Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Earnings $ 0.360 $ 0.435 $ 0.420 $ 0.285
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The Basics of the Demand for Money
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Four StrategiesAlternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips Five Trips Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Cost $ 0.360 $ 0.435 $ 0.420 $ 0.285
![Page 7: Lectures in Macroeconomics- Charles W. Upton The Basics of the Demand for Money](https://reader030.vdocument.in/reader030/viewer/2022032521/56649d575503460f94a36355/html5/thumbnails/7.jpg)
The Basics of the Demand for Money
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Four StrategiesAlternative Cash Management Strategies
Bank Balance 0 Trips One Trip Two Trips Five Trips Monday $ 40 $ 70 $ 80 $ 90 Tuesday $ 40 $ 70 $ 80 $ 80 Wednesday $ 40 $ 70 $ 60 $ 70 Thursday $ 40 $ 40 $ 60 $ 60 Friday $ 40 $ 40 $ 40 $ 50 Saturday $ 40 $ 40 $ 40 $ 40 Daily Balances $ 240 $ 330 $ 360 $ 390 Interest (0.0015 x Daily Balances) $ 0.360 $ 0.495 $ 0.540 $ 0.585 Trip Cost $ 0.060 $ 0.120 $ 0.300 Net Earnings $ 0.360 $ 0.435 $ 0.420 $ 0.285
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The Demand for Money, Day by Day
Monday $ 30 Wednesday $ 10 Friday $ 20 Tuesday $ 20 Thursday $ 30 Saturday $ 10 Average Daily Balance $ 20
$20
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The Basics of the Demand for Money
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Prices Double
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Prices DoubleBank Balance 0 Trips One Trip Two Trips Five Trips
Monday $ 80 $ 140 $ 160 $ 180 Tuesday $ 80 $ 140 $ 160 $ 160 Wednesday $ 80 $ 140 $ 120 $ 140 Thursday $ 80 $ 80 $ 120 $ 120 Friday $ 80 $ 80 $ 80 $100 Saturday $ 80 $ 80 $ 80 $ 80 Daily Balances $ 480 $ 660 $ 720 $ 780 Interest (0.0015 x Daily Balances) $ 0.720 $ 0.990 $ 1.080 $ 1.170 Trip Cost $ 0.120 $ 0.240 $ 0.600 Net Earnings $ 0.720 $ 0.870 $ 0.840 $ 0.570
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Prices DoubleBank Balance 0 Trips One Trip Two Trips Five Trips
Monday $ 80 $ 140 $ 160 $ 180 Tuesday $ 80 $ 140 $ 160 $ 160 Wednesday $ 80 $ 140 $ 120 $ 140 Thursday $ 80 $ 80 $ 120 $ 120 Friday $ 80 $ 80 $ 80 $100 Saturday $ 80 $ 80 $ 80 $ 80 Daily Balances $ 480 $ 660 $ 720 $ 780 Interest (0.0015 x Daily Balances) $ 0.720 $ 0.990 $ 1.080 $ 1.170 Trip Cost $ 0.120 $ 0.240 $ 0.600 Net Earnings $ 0.720 $ 0.870 $ 0.840 $ 0.570
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Prices DoubleBank Balance 0 Trips One Trip Two Trips Five Trips
Monday $ 80 $ 140 $ 160 $ 180 Tuesday $ 80 $ 140 $ 160 $ 160 Wednesday $ 80 $ 140 $ 120 $ 140 Thursday $ 80 $ 80 $ 120 $ 120 Friday $ 80 $ 80 $ 80 $100 Saturday $ 80 $ 80 $ 80 $ 80 Daily Balances $ 480 $ 660 $ 720 $ 780 Interest (0.0015 x Daily Balances) $ 0.720 $ 0.990 $ 1.080 $ 1.170 Trip Cost $ 0.120 $ 0.240 $ 0.600 Net Cost $ 0.720 $ 0.870 $ 0.840 $ 0.570
Conclusion: No change in Cash
Management Strategy, but doubling of
demand for Money
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Implications
• The demand for real money balances, measured in terms of purchasing power, does not change with the price level.
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Implications
• The demand for real money balances, measured in terms of purchasing power, does not change with the price level.
• The demand for nominal money balances, measured in terms of pictures of George Washington, changes in direct proportion to the price level
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Your Income Doubles
• Income Doubles
• A trip to the bank may either– Remain at 6¢– Double to 12¢
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A Doubling of IncomeBank Balance 0 Trips One Trip Two Trips Five Trips
Monday $ 80 $ 140 $ 160 $ 180 Tuesday $ 80 $ 140 $ 160 $ 160 Wednesday $ 80 $ 140 $ 120 $ 140 Thursday $ 80 $ 80 $ 120 $ 120 Friday $ 80 $ 80 $ 80 $100 Saturday $ 80 $ 80 $ 80 $ 80 Daily Balances $ 480 $ 660 $ 720 $ 780 Interest (0.0015 x Daily Balances) $ 0.720 $ 0.990 $ 1.080 $ 1.170 Trip Cost (at 6¢) $ 0.060 $ 0.120 $ 0.300 Net Cost $ 0.720 $ 0.930 $ 0.960 $ 0.870 Trip Cost (at 12¢) $ 0.120 $ 0.240 $ 0.600 Net Earnings $ 0.720 $ 0.870 $ 0.840 $ 0.570
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A Doubling of IncomeBank Balance 0 Trips One Trip Two Trips Five Trips
Monday $ 80 $ 140 $ 160 $ 180 Tuesday $ 80 $ 140 $ 160 $ 160 Wednesday $ 80 $ 140 $ 120 $ 140 Thursday $ 80 $ 80 $ 120 $ 120 Friday $ 80 $ 80 $ 80 $100 Saturday $ 80 $ 80 $ 80 $ 80 Daily Balances $ 480 $ 660 $ 720 $ 780 Interest (0.0015 x Daily Balances) $ 0.720 $ 0.990 $ 1.080 $ 1.170 Trip Cost (at 6¢) $ 0.060 $ 0.120 $ 0.300 Net Cost $ 0.720 $ 0.930 $ 0.960 $ 0.870 Trip Cost (at 12¢) $ 0.120 $ 0.240 $ 0.600 Net Earnings $ 0.720 $ 0.870 $ 0.840 $ 0.570
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The Demand for Money
Optimal Cash Balances With 12¢ Trip Cost
Monday $ 60 Wednesday $ 20 Friday $ 40 Tuesday $ 40 Thursday $ 60 Saturday $ 20 Average Daily Balance $ 40
Optimal Cash Balances With 6¢ Trip Cost
Monday $ 40 Wednesday $ 40 Friday $ 40 Tuesday $ 20 Thursday $ 20 Saturday $ 20 Average Daily Balance $ 30
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The Demand for Money
Optimal Cash Balances With 12¢ Trip Cost
Monday $ 60 Wednesday $ 20 Friday $ 40 Tuesday $ 40 Thursday $ 60 Saturday $ 20 Average Daily Balance $ 40
Optimal Cash Balances With 6¢ Trip Cost
Monday $ 40 Wednesday $ 40 Friday $ 40 Tuesday $ 20 Thursday $ 20 Saturday $ 20 Average Daily Balance $ 30
The demand for money rises with income, but whether it
rises in proportion to income is open to debate.
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The Basics of the Demand for Money
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End
©2005 Charles W. Upton. All rights reserved