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Money Market and Interest Rates, eadcecd8acf60d7d30f609f55d7a3977,…
Money Market and Interest Rates
Liquidity preference
demand for money (L)
Reasons people want to hold their assets in money form
precautionary motive
for emergency purpose
assets (speculative) motive
buy financial assets to store wealth
transactions motive
purchase goods and services
Determinants of demand for money (transaction and precautionary purpose)
Higher
interest rate
, lower demand of money
Higher
nominal GDP
, more demand of money
Higher
price level
, more demand of money
Time of year
(e.g.: Christmas), more demand of money
Higher
frequency people are paid
, people hold lesser money
Determinants of demand of money (assets purpose)
Higher
interest rates
, lower demand of money
People's expectations about the future
Supply of money
Central bank
Print
and issue money to commercial bank
Commercial bank
Supply money through offering
loans
Credit creation
Keep 10% of the bank deposit of savers as reserves and use the balance of money to provide loans to borrowers.
Deposits multiplier
= 1 / liquidity rate (10%)
Liquidity trap
no consumption and no investment
Supply of money will increase but the demand of money remains constant
Central bank
reduces interest rate
and
increase the money supply
to encourage economic activities
Equilibrium in money market
L
(money demand) =
Ms
(money supply)
Produce
Re
(Interest rate) and
Me
(Quantity of money)
downward sloping
:star:
demand of money increase, shift to the right
upward sloping :star:
