The Money Market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded

What happens to the quantity demanded of money when interest rates increases?

Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities

What happens to the quantity demanded when interest rates decrease?

Quantity demanded increases. there is no incentive to convert cash into interest earning assets.

Money Demand Sifters:

Change in price level

Changes in income

Changes in taxation that affects investment

• If the FED increases the money supply, a temporary surplus of money will occur at 5% interest.

• The surplus will cause the interest rate to fall to 2%.

•   The discount rate is the interest rate that the FED charges commercial banks for short terms loans

•       Is the private sector supply and demand of loans\

•      This market brings together the lenders and the borrowers

•     This market shows effect on Real Interest rate

•      Demand- Inverse relationship between real interest rate and quantity loan supplied

•      Supply- Direct relationship between real interest rate and quantity loans supplied

•      This is Not the same as the money market ( SUPPLY IS NOT VERTICAL)

Money Supply:

Increase money supply TO decreases interest rates TO Increases investments

Federal Fund Rate

-   It is the interest rate that banks charge one another for over night loans

The Prime Rate

-      It is the interest rate that banks charge there most credited customers

VIDEO ABOVE WILL HELP AS AN OVERVIEW OF THIS COURSE