![Relation between markets and the: return on capital, price of capital and
money interest rate
• MV=PY where M= money stock; V= velocity of money; P=money as medium of account
and Y= stock of products (production)
and M=1/v[PY] where 1/v=k and k = demand for money
and MV/P = Y where MV/P is use of real money use and Y is Real Income = Real Production
• i = R = r/P where i=real rate of money interest; r=real return = [P*- P] and P= price of
asset (good/bond) [ix100 = r/Px100 to make it possible to relate interest value and return
index – return is relative value – depends on the price of an asset].
• Arbitration, speculation and market equilibrium
7](https://image.slidesharecdn.com/economicsroleofmoney-170824091122/75/Economics-role-of-money-7-2048.jpg)
![Simultaneous equilibrium in the capital, financial and money market
Capital market Money market Financial market
8
I S
Sb [demand
for money]
Lm Ms
QmQb
i=R[=r/p]
↓
Qc
1/p [= i/r]
Market for
maize seed
Market for
money
Market for
bonds
↓ ↓
Db [supply of
money]
i
i*
i[=r/p]](https://image.slidesharecdn.com/economicsroleofmoney-170824091122/75/Economics-role-of-money-8-2048.jpg)
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Economics role of money
Chapter 14 discusses the role of money in the economy, particularly focusing on capital, investment, savings, and the determination of interest rates in various monetary systems, including gold and fiat money. It explores the interaction between capital and money markets, emphasizing the relationship between interest rates, return on capital, and financial prices. The chapter presents models to illustrate how supply and demand for money and capital affect market equilibrium.
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- 1. Role of moneyin the economy chapter 14 Capital, return and interest Real economy Self- sufficient household (economy) – production and consumption Investment and savings Investment, production, savings and return Investment, production, savings, return and the real (natural) interest rate 1
- 2. The determination ofinterest in a capital market Supply of capital (Savings) 2 Return Qc Demand for capital (Investment) r2 r1
- 3. The determination ofinterest in the gold market Determination of interest rate in a commodity money system 3 Interest Qm Demand for gold money i2 i1 Supply of gold money
- 4. Determination of interestin a fiat money system 4 Interest Qm Demand for fiat money i2 i1 Supply of fiat money without a central bank
- 5. The determination ofinterest in the fiat money market Determination of interest rate in a fiat money system with-out and with a central bank 5 Interest Qm Demand for fiat money i2 i1 Supply of fiat money with a central bank
- 6. Financial prices connectmoney and real capital markets: The determination of the price of a bond market Demand of bonds (Save - money exchanged for bonds) 6 1/P Qb Supply of bonds (Investment – bonds exchanged for money 1/P* 1/P
- 7. Relation between marketsand the: return on capital, price of capital and money interest rate • MV=PY where M= money stock; V= velocity of money; P=money as medium of account and Y= stock of products (production) and M=1/v[PY] where 1/v=k and k = demand for money and MV/P = Y where MV/P is use of real money use and Y is Real Income = Real Production • i = R = r/P where i=real rate of money interest; r=real return = [P*- P] and P= price of asset (good/bond) [ix100 = r/Px100 to make it possible to relate interest value and return index – return is relative value – depends on the price of an asset]. • Arbitration, speculation and market equilibrium 7
- 8. Simultaneous equilibrium inthe capital, financial and money market Capital market Money market Financial market 8 I S Sb [demand for money] Lm Ms QmQb i=R[=r/p] ↓ Qc 1/p [= i/r] Market for maize seed Market for money Market for bonds ↓ ↓ Db [supply of money] i i* i[=r/p]