ABSTRACT
The rr schedule plots the relation between the real interest and the stock of real money balances at which the money-capital market is in equilibrium. It can be derived by making use of the extension of the diagram in the left-hand quadrant. The abscissa in this quadrant
I,r
r
r = rem),
mined, in the absence of growth of capital or money, by the intersection of the two schedules, that is, at the point Q. The equilibrium condition is that i = r, so that
,
Now consider the effects of a positive rate of monetary expansion. This can be represented on the diagram by drawing a line pp beneath ii such that the vertical distance between the two schedules represents the rate of monetary expansion. The equilibrium will then be determined at the point where pp and AA intersect. Thus, for the schedule drawn in the diagram, a new equilibrium is reached at V. The equilibrium is characterised by the following phenomena:
The equilibrium conditions are as follows:
The comparative 'statics' of the system are thus established. An increase in the rate of monetary expansion lowers the real interest rate, raises the money interest rate, and lowers the level of real money balances. This is readily seen by differentiating the above system and noting that oi/o(M/P) < 0 and or/o(M/P) > O.
