Money Market Interest Rates Flashcards
(8 cards)
1
Q
What does the money market diagram look like?
A
- y - axis = interest rates
- x-axis = quantity
- downwards sloping demand money curve
- 3 vertical supply money curves = Sm3, Sm1, Sm2.
2
Q
Why is there an inverse relationship with demand for money and interest rates?
A
*at lower interest rates it makes more sense to hold cash, as its less liquid.
3
Q
why is the supply money curve upright?
A
fixed by the central bank, they control it.
4
Q
what happens when supply money intersects demand money curve?
A
equilibrium money market
5
Q
Why does the Supply money curve move?
A
- reserve requirement 0- how much money needs to be held by law (not in uk yet)
- discount rate - rate of which commercial banks borrow
- open market operations -buying and selling of government bonds
6
Q
How does reserve requirements work?
A
- to decrease interest rates, decrease reserve requirements
7
Q
How does discount rate work?
A
- to decrease interest rates, decrease discount/ bank rate
8
Q
How does open market operations work?
A
Dominant way to change interest rate in US
* to decrease interest rates, buy more bonds
