Demand and supply of money Flashcards
What is the money market?
The money market is an economic model describing the supply and demand for money in a nation.
What do consumers and businesses have in common? and what do they use for this purpose, how do economists illustrate this
A demand for money, including cash and checking and savings accounts, and they use financial institutions for this purpose. Economists illustrate money demand using a demand curve, just like they do in the market for products and services.
What is the Keynesian liquidity preference framework theory?
The Liquidity Preference Theory states that the interest rate is the price for money. In simple terms, this means that when money is demanded, it is not because one wants to borrow money but money is demanded due to one’s desire to remain liquid.
The theory suggests that cash is the most accepted liquid asset and more liquid investments are easily cashed in for their full value.
What does the liquidity preference show??
Liquidity preference shows the relationship between the interest rate and the quantity of money the public wishes to hold.
interest rate —> qty of money
Demand for money and interest rates
what happens to the quantity of money people hold to pay for transactions etc.
The quantity of money people hold to pay for transactions and to satisfy precautionary and speculative demand is likely to vary with the interest rates they can earn from alternative assets such as bonds.
An increase in the interest rate=
reduces the quantity of money demanded.
A reduction in the interest rate=
increases the quantity of money demanded.
The transactions, precautionary, and speculative demands for money…
vary negatively with the interest rate
learn graph showing curves for transactionary, Precautionary and Speculative demands for
Money
please please please please please please
Describe the demand curve for money and what it illustrates
The demand curve for money illustrates the quantity of money demanded at a given interest rate. Notice that the demand curve for money is downward sloping, which means that people want to hold less of their wealth in the form of money the higher that interest rates on bonds and other alternative
investments are.
What does the central bank do and what is it’s interaction a part of?
The central bank controls the supply of money, and they interact with other financial institutions. This interaction is part of the money market, and we can illustrate it using a supply curve.
What does the supply curve of money show?
The supply curve of money shows the relationship between the quantity of money supplied and the market interest rate, all other determinants of supply unchanged.
what should we notice about the supply curve of money?
Notice that unlike a typical supply curve in the product market, the supply curve for money is vertical, because it does not depend on interest rates. It depends entirely on decisions made by the central bank.
What have we learned about the central bank through its open-market operations
determines the total quantity of reserves in the banking system.
What shall we assume that banks do?
We shall assume that banks increase the money supply in fixed proportion to their
reserves.
