Abstract
This simple classroom experiment is designed to help students to better understand the concept and the theory of money demand. By simulating what households face in real life, the experiment allows students to reflect on the cost and benefit of holding money and understand how money demand is affected by various factors. The experiment is suitable for an undergraduate macroeconomics course at the introductory or intermediate level. The paper also presents evidence of student learning resulting from the experiment, controlling for student characteristics.
Highlights
Money demand is a key concept in introductory and intermediate macroeconomics. It is at the core of models based on the money market, such as the short-run models and the open economy macroeconomic models adopted in international economics textbooks
By simulating what households face in real life, the experiment gives students an opportunity to reflect on the cost and benefit of holding money and better understand how money demand is affected by expenditure, interest rate, and the cost of transferring financial assets to money
Using data collected from multiple sections of macroeconomics courses at the principles and intermediate levels, the paper finds a strong, positive effect of the experiment, controlling for student characteristics
Summary
Money demand is a key concept in introductory and intermediate macroeconomics. It is at the core of models based on the money market, such as the short-run models (including the conventional IS-LM model and the more recent IS-MP model) and the open economy macroeconomic models adopted in international economics textbooks (for example, the Mundell-Fleming model and Dornbusch’s overshooting model). Observed from past results of running this experiment, students can see that they should hold just enough money to pay for the spending and not carry a money balance at the end of the month.
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