4.5: The Money Market Flashcards
1
Q
The two reasons people demand money
A
- Transaction Demand for money where you hold money for everyday transactions
- Asset Demand for Money where people hold money since it’s less risky than other assets
2
Q
What happened to the quantity demanded of money when interest rates increase?
A
Quantity demanded falls because we prefer interest earning assets
3
Q
What happened to the quantity demanded of money when interest rates decrease?
A
Quantity of money demanded increases because there is no incentive to keep money else where
4
Q
Shifters of money demand
A
- Changes in price level
- Changes in income
- Changes in technology
5
Q
Increase of money supply
A
An increase in money supply will decrease interest rates increasing investment and increasing AD
6
Q
Decrease of money supply
A
A decrease in money supply will increase interest rates decreasing investment and decreasing AD
