00:01
In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously.
00:10
So here we have the following figure, which shows the quantity of money and the interest rate.
00:14
And we can see that this is the original money supply ms1, and then it's going to move over here to ms2.
00:20
This over here, we have the original money demand, and then where it shifts to, and our original interest rate and where it's going to shift to.
00:28
If we define money to include checking deposits, what effect did this legislation have on money? legislation allows the banks to pay interest on checking deposits.
00:39
That is, the returns on money increases relative to other financial assets.
00:44
This makes money more attractive thereby increasing the money demand.
00:49
If the federal reserve had maintained a constant money supply in the face of this change, what would have happened to the interest rate, what would have happened to the aggregate demand or aggregate output? if the fed had maintained a constant money supply at ms1 in the face of the change and money demand is md2...