Why does the W–M–M theorem hold in the analysis of Chapter 22 but not in the analysis presented in this chapter? What is the critical difference in the assumptions that changed this finding and what is your own assessment of their plausibility? Does the W–M–M theorem hold or not hold in modern developed economies? Does it do so in the LDCs with poorly developed financial markets? Discuss. (ii) If currency (a fiat money) is intrinsically useless for firms and households, are demand/checking deposits also intrinsically useless for them? Why, then, do they hold these when there are other highly liquid assets such as savings deposits and money market mutual funds (MMMF) that offer higher returns than demand deposits? If the only demand for checking deposits is for holding savings, as in the OLG models of money, why do banks offer such checking accounts and not confine themselves to savings and term deposit accounts? Why do they offer the latter rather than confining themselves to MMMF? (iii) Discuss the different parts of the following statement: “For the modern economy, the theory of the speculative demand for money has come to the conclusion that there is no longer an asset demand for M1 and that any demand for it is only for facilitating current transactions. However, the OLG models have chosen to assert the asset demand for fiat money, and presumably for M1 also, to the exclusion of the transactions demand and the inventory models of the transactions demand. The OLG models of money, therefore, incorporate an out-of-date and currently non-existent motive for holding M1.
(i) Why does the W–M–M theorem hold in the analysis of Chapter 22 but not in the analysis presented in this chapter? What is the critical difference in the assumptions that changed this finding and what is your own assessment of their plausibility? Does the W–M–M theorem hold or not hold in modern developed economies? Does it do so in the LDCs with poorly developed financial markets? Discuss.
(ii) If currency (a fiat money) is intrinsically useless for firms and households, are demand/checking deposits also intrinsically useless for them? Why, then, do they hold these when there are other highly liquid assets such as savings deposits and
(iii) Discuss the different parts of the following statement: “For the modern economy, the theory of the speculative demand for money has come to the conclusion that there is no longer an asset demand for M1 and that any demand for it is only for facilitating current transactions. However, the OLG models have chosen to assert the asset demand for fiat money, and presumably for M1 also, to the exclusion of the transactions demand and the inventory models of the transactions demand. The OLG models of money, therefore, incorporate an out-of-date and currently non-existent motive for holding M1.”
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