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I am currently studying the demand for money by Blanchard. this model assumes that the amount of money held is basically related to transaction levels and the the attractiveness of bonds.

i.e.: Demand for money = Y . L(i)

where L(i) is a function of the interest rate. My question is this: How does the money demand increase at low-interest rates and decrease at high-interest rates when at the same time bonds are more attractive at low interest rates?

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    $\begingroup$ What makes you think "bonds are more attractive at low interest rates"? I would have thought a bond paying $20\%$ was more attractive than another bond paying $0.5\%$ if they have the same risk $\endgroup$ – Henry Nov 9 '19 at 4:08
  • $\begingroup$ @Henry i assumed that bonds are more attractive at low interest rates as they would offer a higher interest rate? (i.e. the bond price and interest rate relationship) $\endgroup$ – jpm78 Nov 9 '19 at 11:14
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    $\begingroup$ Bonds may be attractive if you think interest rates are about to fall, for the reason you give. But once interest rates have fallen and the bond price has risen, then bonds are less attractive because their yield is now lower $\endgroup$ – Henry Nov 9 '19 at 11:36

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