The relation between the demand for money, nominal income and the interest rate O Md=SYl( (41) ●Mp/$Y=L() (4.2) o The demand for money increases in proportion to nominal income o The demand for money depends on the interest rate. This is captured by the function L( and the negative sign underneath An increase in the interest rate decreases the demand for money. 2003-6-29 32003-6-29 3 The relation between the demand for money, nominal income, and the interest rate Md =$YL(i) (4.1) (-) Md /$Y=L(i) (4.2) ⚫ The demand for money increases in proportion to nominal income. ⚫ The demand for money depends on the interest rate. This is captured by the function L(i) and the negative sign underneath: An increase in the interest rate decreases the demand for money