Unit 4.5 : The Money Market

Transaction Demand for Money and Asset Demand for Money

At any time, people demand a certain amount of liquid assets (money) for 2 reasons ...

Transaction Demand for Money

people hold money for everyday transactions

Asset Demand for Money

people hold money since it's less risky than other assets

the interest you could be earning from other financial assets like stocks, bonds, and real estate

What's the opportunity cost for money in your pocket or in your checking account?

the quantity demanded falls because people prefer to have interest-earning assets instead

What's the quantity demanded of money when the interest rate rises?

the quantity demanded increases because there's no incentive to convert cash into interest earning assets

Whats the quantity demanded of money when the interest rate falls?

inverse

______ relationship between interest rate and quantity of money demanded

lower

As interest rates fall, there's a ______ opportunity cost associated with holding money in your pocket or checking account

changes in price level, income, and technology

Money Demand Shifters

US Money Supply

set by Central Bank and is dependent from interest rate (vertical line)

Monetary Policy

the Fed is a nonpartisan government office that adjusts money supply to influence the economy

surplus; fall

If money supply increase, a temporary _____ of money will occur at 5% interest. This causes the interest rate to ____.

increase in money supply --> decrease in interest rate --> increase in investment --> increase in AD

How is the aggregate demand affected by a surplus of money and fall in the interest rate?

shortage; rise

If the money supply decreases, a temporary ____ of money will occur at 5% interest. This causes interest rates to ____.

decrease in money supply --> increase in interest rate --> decrease in investment --> decrease in AD

How is the aggregate demand affected by a shortage of money and increase in interest rates?