Unit 2
- 1. UNIT 2 NEOCLASSICAL SYNTHESIS structure 2.0 Objectives 2.1 Introduction 2.2 InvestmentFunction 2.3 Demandsfor andSupplyofMoney 2.4 EquilibriuminReal Sector-ISCurve 2.5 EquilibriuminMonetarySector-LMCurve 2.6 SynthesisofRealand Monetary Sectors 2.7 LetUs Sum Up 2.8 Key Words 2.9 SomeUsell Books 2.10 AnswersIHints to CheckYourProgressExercises 2.0 OBJECTIVES AAergoingthroughthisunityoushouldbeinapositionto explaintheequilibriuminrealandmoneymarketsinaneconomy; explaintheunderlyingideasbehind IScurve; explaintheunderlyingideasbehindLMcurve; explainthe interactionofISandLMcurve;and apprisetheeffectivenessofmonetaryandfiscal policiesinaneconomy. 2.1 INTRODUCTION In the previous Unit we discussed the classical and Keynesian views on the determination of output and prices in an economy.According to the classical economists supply creates its own demand and full employmentprevailsthrough adjustments in prices and wage rate. TheKeynesianview,however,assumesthat price level and wage rate are sticky in an economydue to various factors such as labourcontracts and labourlaws sothat adjustmentto demand shockstakes place not through adjustmentsinprices andwage rate but through changesin outputand employment levels. In fact, Keynesianeconomicspresents a view oppositeto the classicaleconomiststhat demandcreatesitsown supplyso longasunemployment existsinthe economy. Theclassicaleconomistsassumedadichotomybetween therealandmonetarysectors ofaneconomy.Accordingtothemanincreaseinmoney supply(M, )inaneconomy with output and employmentlevelsunchanged,will translateinto a proportionate increase in prices. Therefore, through increase in price level and wage rate the adjustmentprocesswillbeginandfullemploymentwill be maintained. 711edifferenceinviewsbetyee~classicalandKeynesianeconomistsisdueprimarily to thetimehorizon considered.In the Keynesianviewinthe longrunprice leveland
- 2. Traditional*ppmaehe~toA~~ wage rate will adjust to - , .A,, rum levels. But in the short run due to price and Macroeconomics wage rigiditiesful' ,iilployment equilibriumwill not be realised.The neocl-xical economists, particularly Sir John Hicks, have attempted to combine the ideas containedin both the schoolsof thoughtand to bring a synthesis between the real sectorand the monetarysector of the economy. 1 We shouldrememberthat theclassicaleconomistsdid not botheraboutthe quantity of money supplied,as it did not affectoutput and employmentaccordingto them. The Keynesian economists,however,projected an activerole for money supplyas it can influencethe levelsof outputand employment. In continuation of the basic ideas presented in the previous Unit we discuss the behaviourofinvestmentfunctionbelow. 2.2 INVESTMENT FUNCTION The classicaleconomistsdid not pay much attentionto the increasein capital stock dueto investmenttakingplace in aneconomy.We knowthat investmentresults in atl increase in the level of capital input. In the production process the inputs are transformedto outputwiththehelp oftechnology.It isan important featdreofcapital input that it is durable in nature, that is, it does not get exhausted in a single use Ilowever, certaindepreciation (that is, wear and tear) to capital stock is involved when production takes place. TL- I + . . ~ I. l , , , L cf cqital stock increaseswhen net investment(gross investmentminzls depreciation)isincurred.We will look intothe growthofcapitalstockandconsequent rise in output in Block 2. Investment takes place in an economy because it provides certain returns to the investor and there is a profit motive involved. The return to investment can be measuredbythemarginalproduct ofcapital(MPK), which isdefined asthe increase in output when capital stock increases by a single unit. Simultaneously,business firms or households have to borrow by paying certain rate of interest in order to undertake investment. Even in cases when a household or business firm do not requireborrowing,the implicitcost ofthe investmentisthe interest foregone.For example,if I construct anew house (that is, I undertake some investment), Ihave the option of taking a loan from a bank on the condition that I repay the principal alongwithinterest.Similarly,businessfirmsundertakeinvestmentsto produce goods and services. In doing so they take intd account two factors: i) the return from investmentwhich isdeterminedby MPK,andii)prevailingrate ofinterest.If return to investment is higher than interest rate they undertake the investment project, otherwise it isnot profitableto them. The equilibrium levelof investment will be achievedwhen the ratesf interestisequalto the rate of return from investment. It isa commonfeatureofthe aggregateproduction functionthat as we increqsethe levelofcapitalinputthemarginalproductivityofcapitaldecreases.Thusasmerit increasesthereturnto investmentdecreases.Increased levelofbvestment, thereibre, canbe undertakenonlywhen therate of interest isrelatively lower. In Fig. 2.1 we presentthe investmentfuhctionasa downward slopingstraight line. We measurethe levelof investmefit(I)on x-axisand the rate of intereston y-axis. Whentherate of interestisr, the levelof investment isI,. In casethe rate of interest declinesto r2the level of investment increasesto 12.
- 3. Neoclassical Synthesis I, 1 2 Fig.2.1: InvestmentFunction Apart from theprevailing rateof interest(r)thedecisionto invert dependsto a great extant an expectations about future movements in prices, resources availability, governmentpolicy, competitionfromrivalfirmsandproduct, etc. Sinceinvestment involves creation of capital stocks which remains in use for a longer creationof capital stocks which remains in use for a longer period of time, the element of uncertainty playsa vitalrole in investmentdecisions. Economistshavefounditquitedifficulttoexplainthepatternofinvestmentspending. Thereareseveralecononletricmodelstoexplain investmentbehaviourandnoneof the models have been proved to be superior over others. The accelerator model of investment short that rate of investment depends upon changesinaggregateoutput.It statesthatdesiredlevel ofcapitalstockinthe economy isa constantfractionof output level,that is, k =h Q. Thus,asoutput level changes capitalstockalsochanges.In periodsof increasingeconomicactivity,when growth ratein GDPishigher, thereis a senseof securityinthe minds of entrepreneursand they undertake investments. Onthe otherhand, inperiodsofrecession,there in not much increase in investment. Thus investment not only influences output (recall multipliermodel),it is influencedby thechanges in output. I ?'headjustmentcost model statesthata firmundertakesfeasibilitystudies,machines analysisand financial arrangementsbefore implementingas investment decision. Secondlythereisacostinvolvedininstallationofnowmachinery,trainingofworkers to operatethe new technologyanddisruptionofproductionchain. Thesecostsare calledadjustmentcostsandrise ifthechangeisdoneina shortperiod oftime. Thus i firms make gradual changes in theircapital stock even though the requirementis I much higher.Accordingto adjustmentcostmodelsof investment,there isalwaysa gapbetween desired level of capital stock and actual level of capital stock. I
- 4. TraditionalApproaches to Macroeconomics 2.3 DEMANDFORAND SUPPLYOFMONEY Money servesthree importantfunctionsin an economy,viz., mediumof exchange, unit of account, and store of value. In an economy without money it would be extremelydifficult to exchangegoodsand servicesthrough 'barter' aswas the case before 'paper money' was invented.Modemmoneyhassignificantlyeasedthemode of exchange -we can go to the market and buy or sell goods and services in exchangefor money. Secondly,money servesasa unit of accountinthe sensethat the value of goods and servicesare measured in terms of money. Thirdly,paper money although doesnot have anyintrinsicvalue it is storedbecause it commands certainpurchasing power in the market. Demandformoney(M,,)arisesasitperformstheabove-mentionedhctions-allof us want tohave moremoney. Theclassicaleconomistsput more importanceon the medium ofexchangefunctionofmoneyandsuggestedthatpeopledemandformoney, as it isrequired to carryout transactionsin the market.We receive our income on a monthlyorweekly basis (itcanbehighlyirregularalso)whilewe makepurchasesina routinemanner.Thusthereisnosynchronisationbetweenthetimewereceiveourincome andwe carryoutmonetarytransactions'. Keynesrecognisedthat therearethreetypes ofdemandfor money,viz., transaction demand, precautionary demand and speculativedemand. People store money as a precautioninordertomeetexigenciesinday-to-daylife,whichisdifferenth mtransaction demand.Precautionarydemand formoneydependsupontheperception oftheperson concernedwithrespecttoperiodicityofincome,stabilityinincomeflowanduncertainty infutureincomestream.Letusdenotethe sumoftransactiondemandandprecautionary demand for money as M; .We assume that Mf;is a constant proportion of total income. Thethirdtypeof demand formoney, accordingto Keynes,isthe speculativedemand (M ; ), which is used largely for purchase of financialassets.Theseassets couldbe interest-yieldingbondsordividend-yieldingshares(ofafm).Thespeculativedemand formoney dependsupon the portfolioofassetsthat we need to maintain. If we hold moneyinthe formofcashthereturnto money iszero.Moreover,ifthereisinflationin theeconomythenthereisadeclineinpurchasingpower.However,ifweput it instocks (that is,shares)thereisconsiderablerisk involvedasstockpricesvary andwe losepart ofourmoneywhen stockpricesdecline.Wecankeepmoney in somefixeddepositor fixedincome-yieldingasset,butinthatcasewehavetocompromisewithliquidityinthe sensethat itmay notbepossibletogetback cashimmediately. Accordingtoclassicaleconomists,whenthereisexcessoflonablefunds(thatis,saving , available-forinvestment)inthe marketcomparedtodemand for it(thatis, investment requirement)thenthereisadeclineintherateof interest. The increaseinmoneysupply bythecentralbank (forexample,ReserveBank of India)increaseslonablehnd inthe economy.If there isnocorrespondingincreaseindemandformoney, equilibriumin money marketcanbeachievedonlythroughadeclineintherateof interest.In fact,the classicaleconomistsassumedflexibilityininterestrateforrealisationofequilibriumin moneymarket. I 'The demand for money according to classical economists was determined by the 'quantity 1 theoryof money', accordingto which MV =PY, where M ismoney supply,V isvelocity ofmoney, P isprice level and Y is output level. When V and Y are given,P is proportional to M. Thuswhen money supply increasesthere is a proportional increase in price level.
- 5. Neoclassical Synthesis 1, Fig.2.2: LiquidityTrap Theprecautionary andtransaction demand for money may be a fixedproportionof incomeanddependantupon certainpsychologicalfactorsapartfrombasicrequirement. The speculativedemandformoney ( M i), on the otherhand, dependsupon rate of interest.When rateof interestishigh, peoplekeeparelativelyloweramountintheform ofcash,astheywouldbelosingoutinterestotherwise.Ontheotherhand,whentherate of interestislowpeople preferto keepa relativelyhigher amountofcashwith them. Thusspeculativedemandformoneyisaninversefunctionofinterestrate(seeFig.2.2). AccordingtoKeyneswhenrateofinterestissufficientlylow(sayr, inFig.2.2)people prefer to keeptheir incomeinthe formof cashwith themselvesinstead of financial assets.Thelossdueto interestthattheir incomecould haveearnedisminimal when interestrateisverylow. In terms of Fig. 2.2 the curverepresenting speculativedemandfor money becomes , infinitelyelastic(horizontal)whenrateofinterestislow.Thissegmentiscalled'liquidity trap' becausepeopleprefer liquiditytokeepingtheirmoneyinfinancialassets. Rccall fromUnit 1that incomeservestwo purposes: it is eitherconsumedor saved. Thmfore, itisimplicitlyassumedthatwhateverisnotsavedisconsumed.Thusahigher savingmeansreduced consumption. Unlessthehigher savingtranslatesintohigher investmenttherewould be a declineinaggregatedemandand consequentlya fall in outputlevel. When Keynestalks ofliquiditytraphemeansthatthereisan increasein savingbutthereisnocorrespondingincreasein investment.Thusgovernmentpolicy of injectingmoneyintothesystemori n m i n gincomeofpeopledoesnothawanyimpact, asitisdivertedtowardssavingwithoutincreaseinconsumption. Youmaybewonderingwhethersuchsituationstakeplace inreality.Duringlate 1990s Japaneseeconomywentthroughsevererecessionwith declinein output,pricesand interestrate.Forquitesometimeintheyear2003therate ofinterestwas0.03per cent perannum.Insuchsituationsmonetarypolicybecomesineffective. The supplyofmoney constitutesthe currency in circulationand deposits in banks. Money is usually supplied by the central bank.of a country andthere are various measures of money supply dependingupon its liquidity. In Indiafor example we
- 6. TraditionalApproachesto Macroeconomics have money supplymeasuressuchas MI,M2 andM3 which aredistinctfromeach other. CheckYourProgress 1 1) What are the types of demand for money? What are the factors on which the 1 demandformoneyisdependentupon? ~ 2) Explaintheconceptof'liquiditytrap'? Whydoesmonetarypolicybecomeineffective iftheeconomyisonpassingthroughaphaseofliquiditykip? I 2.4 EQUILIBRIUMINREALSECTOR-ISCURVE InFig. 1.4inUnit 1wehaveshowntheequilibriumoutput at a levelwhen aggregate demandequalsaggregatesupply.Inasimplemodel-gate demand(AD) comprises C+I,herewe clubgovernmentexpenditureinvestmentforsimplerexposition,while aggregatesupply(AS)comprisesCandS.ThusattheequilibriumlevelofoutputI=S. In Fig. 1.4 we assumethe level of investmentto be fixed so that it is depicted as a horizontalstraightline.InFig.2.3 wepresenttheinWactionofsaving(S)andinvestment (I) functions. When investment is I, and savingfimctionisrepresentedby S,then f equilibriumoutputisY,. Wenotice abasic differencebetween exFig. 2.1 and Fig. 2:3. In Fig. 2.1 investment dependsupontherate ofinterest (r)suchthatmoreisinvestedwhen a lowerinterest rateprevailsintheeconomy.InFig.2.3 investmentisshowntobeafunctionofY. Both thesaving4investmenth t i o n scanheintegr-dedsothatweobtainequilibriumlevels ofr andY. TheIS curvebased onneoclassicalideasshowsthe cquilibriurninthe real sectoroftheeconomy(see Fig.2.4)
- 7. Saving. investnient Fig.23: EquilibriumOutputLevel Inorderto explainFig.2.4 letus beginwiththe secondquadrant(north-westcomerof thediagram).ThisrepresentstheinvestmentcurvepresentedinFig.2.1. Theonlychange hereisthatwe measureinvestmentonx-axis inthe oppositedirection.The farthera pointtothe leftfromtheorigin,higher isthelevelofinvestment.Inthethird quadrant (thatis, south-westcomer)we measureI on x-axisand Son y-axis.Wehave drawna 45Olinesothat S=I(impliesequilibriumlevelofoutput)alongthisline.Inthe fourth quadrantx-axismeasuresincome(Y) andy-axismeasuressavings. ered h a v eh w n the savingfunction(Fig. 2.3 in invertedposition) and itgivesthe level of savingfor differentlevelsofin&e @member thatx-axismeasuresincomehere). Thusoncewe knowtherequiredlevelofsavingweknowthelevelofincomefkomthesavingfunction. 4 Inthefirstquadrant(north-eastcomer)wehavetheIScurve,whichwe derivebyusing theinformationcontainedinotherthreequadrants.Inthefirstquadrantwehavetherate ofinterestony-axisandincomeonx-axis. S = I Fig. 2.4: ISCurve Neoclassical Synthesis
- 8. TraditionalApproaches Macroeconomics to NowletusexplainhowweobtainedtheIScurve.Letusassumethat investmentisgiven tous (seesecondquadrant).Bylookingintothethirdquadrantwe findtheequilibrium levelof saving(sinceSshouldbeequal to Iatequilibrium).Next, ifwe look intothe fourthquadrant,giventherequiredlevelofsaving,weobtainthcequilibriumlevelof homebydrawingaperjmdicularlinefromthesavingfimctiontoihex-axk.Byc o m b i i differentlevelsofinvestmentandsavingwederivetheIScurve.Thuseverypointonthe IScurverepresentsequilibriumlevelsofincomeandinterestrate Whenthereischangeinthelevelofinvestmentthereisawholese~,,ie;lce ofclianges- therequiredlevelofsavingwill change,therequiredlevelof incomewill change.An implicationoftheIScurveisthatthegoodsmarket(realsector)canbeatequilibriumin anycombinationoflowerinterestrateandhigherincome,orahigherinterestrateand lowerincome. 2.5 EQUILIBRIUM IN MONETARY SECTOR - LM CURVE ?'hederivationof LMcurveutilisesthe Keynesianviewthat speculativedemand and transactiondemandformoneyare separate.TheLMcurveispresentedinFig. 2.5. nordertoexplainFig.2.5 we againbegin withthe secondquadrant.Herewemeasure interestrateony-axisandspeculativedemandformoneyonx-axis.Itisare-presentation of Fig. 2.2with the differencethat M: ismeasured in the oppositedirection. Thus W e rapointh mtheoriginhigheristhelevelofspeculativedemandformoney. From thespeculativedemandhction, giventheprevailingrateofinterest,wecanf i doutthe quantityofspeculativedemand.Thethirdquadrantshowsthatequilibriuminthemoney marketcanbeachievedwhendemandformoneyisequalto supplyofmoiiey.Herewe measure M; ony-axisand onx-axis. Weknowthattotal demand formoney is M:,Y Fig.2.5: L&lCurve
- 9. given by Mf:+M,';.For equilibrium in the money market to be realised (that is, Neoclassical Synthesis M , =M , )we have drawna straightline, whichtouchesy-axisat M; (since MI: = 0atthispoint) andtouchesx-axisat M; (since M ; =0atthispoint).Ifrateof interest islowmoremoney isdemandedforspeculativepurposes, which implieslessmoneyis leftfortransaction demand. Recall thattransaction demandformoney isaconstant proportionof income.Thushigherlevelof M ; correspondstohigherlevelofY.This behaviourisrepresentedinastraightlineinthefourthquadrant. In thefirstquadranttheLMcurveisgivenwhichisupward sloping.Alongy-axis we measuretherateof interestwhile incomeismeasured onthe x-axis.Rememberthat eachpoint ontheLM curverepresentsequilibriuminthemoneyrnarket.Animplication oftheLM curveisthatmoneymarketequilibriumcombineslowerrwith loweryand higherrwithhigherY 2.6 SYNTHESIS OF REAL ANDMONETARY SECTORS Now letus combineISandLMcurvesasshowninFig.2.6.SuchintegrationofIS-LM givesauniquecombinationofrandY,whichrepresentsequilibriuminbothxalmarket andrponeymarket.In Fig.2 6wefindthatr, andY,issuchacombinationfortheISand LMekes.Rememberthat we havemaintained fixedpricesin themodel, which is simplisticbut convenient.Inthismodelitisnot necessarythatequilibriumincomeand interestrateguarantee111employment.Insuchacasethegovernmentneedstointervene. Therecouldbetwopolicy instrumentsforinterventionbythegcivernrnent:fiscalpolicy andmonetarypolicy. Fiscalpolicyreferstotaxationandexpendituremeasuresbythe government.When the governmentincreasesitsexpenditurethere isan increasein investments,whichresultsinanupwardshiftintheinvestmentschedule.weh&e shown in Fig. 2.4 a shiftin the investment scheduleby a dottedline. Dueto the shift inthe investmentschedulethereisanoutwardshifiintheIScurvealsoandequilibriumlevelof output increases.Wehave shownsuchashift intheIScurveinFig.2.4byadottedline. Anothermeasure under fiscal policyisthereduction of taxrateson income.Sucha measurewillchangethenatureofconsumptionhction(alsosavingfunction)andleave peoplewith moreincome. SuchameasurewillshifttheIScurveupward.Theopposite effecttakesplacewhen governmentexpenditureiscurtailedortaxratesareincreased. Rememberthatchangesin fiscalpolicyaffectsIScurve. Monetarypolicyreferstochangesinmoneysupplyintheeconomybythecentralbank (forexample,ReserveBankofIndia).Itwilleffectashiftinthe LMcurve.Whenthere isanincreaseinmoneystipply,anincreaseinreal balancestakesplace,whichdecreases# rateofinterest.Whenrateofinterestdeclinesforeachlevelofincomethereisadownward shift in the LM curve (dotted line in Fig. 2.6)accordinglytherewill be a changein equilibrium levelsofrandY(notshowninthefigure). ' Throughappropriatechangesinfiscalpolicyandmonetpypolicythegovernmentcan I interveneandsteer theeconomytowardsfullemploymentequilibriumlevel. I Wehavementioned earlierin Section2.3that monetarypolicy becomesineffective i whentheeconomyispassingthroughaliquiditytrap. Infact,thedifferencebetweenthe classicalandKeynesianpositionscanbeshownthroughtheIS-LMmodel. I
- 10. TraditionalApproachesto Macroeconomics 4 y2 Y Fig.2.6: ISLM Model InFig.2.7 wehave showntheclassicalandKeynesianrange intheLMcurve.Wehav& positionedtheIScurveatdifferentsegmentsoftheLMcurve.Letusbeginwiththecast% whentheeconomyisoperatingatincomelevelY,. At thispointLMcurveisinfinitely elastic.Ifthegovernmentincreaseitsexpenditurebyborrowingfromthemarkettherei$ noincreaseininterestrateasthereissufficientidlespeculativebalancesintheeconom)/. Thereisanincreaseinincomeleveldueto shiftinIS curvefromIS,to IS', Thisisth$ Keynesianrangewheretheeconomyisoperatinginaphaseinvolvingliquiditytrap.Ifi suchsituationsmonetarypolicybecomesineffectiveandthegovernmentshouldintervent: throughappropriatefiscalmeasures. ", y2 u1 Fig.2.7: Classicaland KeynesianRange
- 11. Now letuslookintotheotherexbremewhentheeconomyisoperatingatincomelevelof Neoclassical Synthesis Y,.Atthis levelan increaseingovernmentexpenditureresultsinashiftintheIScurve from IS, to IS',. Seethat at this leveltheLM curve isperfectlyinelastic,the rate of interestisalreadyveryhigh,andrealbalancesintheeconomyislow.Whengovernment borrowsfromthemarket,itcompeteswithprivateinvestmentandthereisanincreasein interestrate-incomeleveldoesnotincrease.Thisistheclassicalrange. Inpractice,however,the economyusuallyoperatesatamoderatelevelofincome,Y,. Atthislevel,theeconomyhasnotreachedfullemploymentequilibriumlevel.Whenthe governmentborrowsfromthemarketitcompeteswithprivateinvestmentbutitdoesnot 'crowd out' private investmentcompletely.As a result of increase in government expendituretheIScurveshiftsfromIS, toIS',. Thereisanincreaseintherateofinterest aswellasthe income. CheckYourProgress2 1) Explaintheprocessofdetaminationofequilibriumintherealsectoroftheeconomy. 2) WhatdoestheLMcurvesignify?Whyisitupwardsloping?Explainthroughsuitable d i m . 3) ExplainthroughIS-LMcurvetheineffectivenessofmonetaryandh a 1policies.
- 12. lkaditionalApproachesto Marrrrpcnnnmirr . 2.7 LETUS SUMUP Therearethreetypesofdemandformoney:transactiondemand,precautionarydemand I andspeculativedemand.While&insactionandprecautionarydemandareconsidered to be dependentuponlevelof income,speculativedemand formoneydependsupon prevailingrateofinterest.Whenrateofinterestistoolow,speculativedemandisperfectly elasticandadditionalincomein thehandsofpeople inthe formof idlecashbalances withoutanyincreaseinconsumptionexpenditure.Suchasituationiscalledliquiditytrap resort toappropriatefiscalpolicy. Iandinterventionthroughmonetarypolicybecomesineffectiveandgovernmentshould 1 ThroughtheIS-LMmodelwedetermineauniquecombiionofinterestrateandincome intheeconomywherebothreal sectorandmonetarysectorareinequilibrium.However, suchequilibriummaynotbeat111employmentlevel.Inordertobringin111employment .thegovernmentshouldintervenebyincreasingitsexpenditure. I I 2.8 KEYWORDS I Liquidiih p A situationofverylowrateofinterestwhenpeopledo not increaseconsumptionexpenditureandadditional I moneyincomeissaved. I SpeculativeDemand That part of demand for money which dependsupon rateofinhestandused forinvestmentinfinancialassets. Inflation Aperiodofsustainedriseinoverallprices. ProductionFunction Thetechnicalrelationshipbetween iriputsandoutput. 2.9 SOMEUSEFULBOOKS Mankiw,N. G,2000,Macroeconomics,FourthEdition,Macmillan,New Delhi. Samuelson,P. A. and W. D. Nordhaus, 2005,Economics, Eighteenth Edition,Tata McGrawHill,Delhi. 2.10 ANSWERShXINTSTOCHECK YOUR PROGRESSEXERCISES checkYourProgress1 . 1) Gothrough Section2.3. Discusstransation,precautionaryandspeculativedemand formoney. 2) SeeSection2.3 andanswer. CheckYourProgress2 1) s is cussthemethodthroughwhichweobtaintheIScurve. SeeSection2.4. 2) LMcurvesignifieequilibriuminthemoneymarket.ExplainFig.2.5. 3) GothroughSection2.6 andExplainFig.2.7.