Money Market (Money Demand Curve, Money Supply Curve)

money market graph

axes: ↑nominal interest rate (i), →quantity of money

curves: money demand/supply

money supply curve (MS)

vertical line on money market graph representing current money quantity

money demand curve (MD)

curve that shows the relationship between quantity of money (cash in circulation) and nominal interest rate. Slopes down b/c increased interest increases opportunity cost of holding money, which reduces quantity of money demanded

money demand shifts

purchasing power (price level)

income (more transactions motive)

rGDP (through increased income)

technology (bank payment convenience)

bank operations (bank convenience, benefits)

liquidity preference

the amount of money people want to hold in cash

liquidity preference model of the interest rate

asserts that interest rate is determined by money supply/demand

transactions motive

desire to hold money in order to consume (higher in people with higher income)