Which of the following spreads does NOT enter Friedman's equation for money demand? A) r_b- r_m B) r_b- r_s C) r_s- r_m D) They all enter Friedman's equation.

Question

Quizplus · Accepted Answer

According to Friedman's equation, the demand for money is primarily determined by the nominal interest rate, the level of permanent income, and the average expected inflation rate. None of the options include the average expected inflation rate, so they are all potentially valid. However, option B includes the term "S1U1B1s," which represents speculative transactions balances, rather than the term "S1U1B1m," which represents precautionary transactions balances. Friedman's argument focused on the demand for precautionary balances, so option B does not enter Friedman's equation.

Which of the Following Spreads Does NOT Enter Friedman's Equation