The Role of Money
Real Cash Balances. Related to Aggregate Demand.
No issue in economics is less settled than the demand for money.
The Unique Nature of Money
In an exchange economy,
What is money?
What is the price of money?
1, P, R, E.
The Supply of Money
The supply of money is a noncontroversial institutional detail.
The Demand for Money
Views
The Classical View
Y is determined by real factors of production. P adjusts to achieve equilibrium in the supply and demand for money. R plays no role in the analysis. This produces the aggregate demand curve.
The Keynesian View
Now, M V(R) = P Y.
The LM Curve traces out combinations of Y and R that are consistent with equilibrium in the supply and demand for money. P is fixed in the short run.
The Monetarist View
Velocity is a stable function of interest rates. In the short run, Y adjusts. In the long run, P adjusts.
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