Concepts
- Money Demand (Transactions Demand)
- Opportunity Cost of Holding Money
- Nominal Interest Rate vs. Real Interest Rate
- Determinants of the Demand for Money
- Price Level
- RGDP
- Money Supply (M1)
- Money Market Equilibrium
- Impact of Monetary Policy on the Money Market
- Money Market is a Short-Run Graph
Overview
The money market graph is a very important concept in this unit. Like every other market graph we have learned in this class, it is subject to the market forces of supply and demand. The demand for money represents the amount of spendable money that people and businesses choose to hold. This amount changes in response to changes in the interest rate (return on saving). When interest rates go up, people hold less spending money and when interest rates go down, people hold more spending money. This inverse relationship is illustrated by the downward sloping demand for money line. The money supply is a vertical line on this graph. It’s vertical because the Federal Reserve says so. They set the monetary target and have the power to make it happen. When we observe both lines on this graph we can find equilibrium in the money market and see how monetary policy affects the equilibrium values.
Materials
Lecture
Video Coming at Later Date
Quiz
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