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(M/P)^d=L(i,Y)

M=Money supply

P=Price

d=Demand

i=Nominal interest rate

Y=?Output

Does L mean liquidity? Or does it simply mean that the LHS depends on i and Y?

Thank you!

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    $\begingroup$ Why ask something on Econ StackExchange that you can google in 5 seconds? $\endgroup$
    – VARulle
    Commented Sep 19, 2022 at 8:54
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    $\begingroup$ @VARulle This is a personal quirk, but I don't like "Google is your friend" type responses unless they link to a Google query with specific search words. I too was once a beginner, who did not know what a powerful tool Google was, how to choose good keywords, or (not relevant for this case) that subpages like scholar.google.com existed. Hypocrisy disclaimer: I probably post similar responses every now and then. $\endgroup$
    – Giskard
    Commented Sep 19, 2022 at 9:22
  • $\begingroup$ @VARulle Also, OP seems confused and asking for confirmation, which sometimes you can't get from Google because it also throws up lower quality pages like Investopedia, so sometimes you read two seemingly contradictory explanations. This is especially irksome if you are not proficient in English. $\endgroup$
    – Giskard
    Commented Sep 19, 2022 at 9:24
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    $\begingroup$ @Giskard: In general I agree with this, but in the current case even just googling the title question gives you 5 correct answers on the first page, so I'm not sure how serious the question really is. $\endgroup$
    – VARulle
    Commented Sep 19, 2022 at 10:29
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    $\begingroup$ Which one is correct please: "Does L mean liquidity? Or does it simply mean that the LHS depends on i and Y?" Thank you!! $\endgroup$
    – povt
    Commented Sep 20, 2022 at 8:14

1 Answer 1

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Does L mean liquidity? Or does it simply mean that the LHS depends on i and Y?

$L$ means simply that the money demand depends on $i$ and $Y$. You could have written $f(i, Y)$ or $\gamma (i, Y)$ or what you prefer, it's the same, from an analytical point of view.

However, it is usual to write $L$ for mnemonic purposes or to make clearer, at first sight, what the symbol refers to from an economic point of view, that is the money demand function. As you write $I$ for investment or $C$ for consumption, and don't write, say, $Z$ for investment or $\eta$ for consumption.

Obviously, the letter $L$ is borrowed from 'Liquidity'.

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