Unit 4 : Money Market

Money Market
  • The market where the FED ad the users of money interact thus determining the nominal interest rate (i%)
  • Money Demand (MD) comes from households, firms, government and the foreign sector.
  • The Money Supply (MS) us determined only by the Federal Reserve
Money Demand 
  • Transaction Demand: demand for money as a medium of exchange (independent of the interest rate)
  • Asset Demand: demand for money as a store of value (dependent on the interest rate)
  • Total Money Demand: (MD) is downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds. At lower interest rates people sacrifice less when they hold money 
Money Supply 

  • The money supply is determined by the Federal Reserve because the FED has monopoly control over the supply of money 
Image result for money market graph

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