Defining the demand for central bank money as $ [c + \theta (1-c)]M^d $, where c = percentage of money people keep as currency, and $\theta$ the reserve rateo, I don't understand why, as my book states, an increase in either c or $\theta$ would result in a right shift of the curve.

My reasoning is: $ [c + \theta (1-c)]$ get's higher and $ M^d $ is a negative sloped function, therefore $M^D$ should get steeper.


1 Answer 1


Well this depends on parameters of $M^d$, but for reasonable parameters $M^d$ always shifts to the right. I assume your textbook uses linear money demand for example $M^d = c - b i$ and so on.

Denote $[c+θ(1−c)] = \gamma$, then for linear downward sloping demand we have:

$\gamma M^d = \gamma c - \gamma bi$

if $\gamma$ increases demand shifts to the right for any parameters save $c=0$ or $\gamma=0$ (assuming all parameters have to be non-negative). Demand will also become steeper as long as $b >0$ but you will always


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.