3/22 Money Market
(The Supply and Demand thereof)- Demand for money (DM) has an inverse relationship btwn nominal interest rate (i or ir) and quantity of money demanded (Qm or QD - quantity demanded)
- when ir increases, QD falls b/c individuals would prefer to have interest earning assets instead of borrowed liabilities
- when ir decreases, QD increases, no incentive to convert cash into interest earning assets
Money Demand (DM) Shifters
- Δ in PL
- Δ in Income
- Δ in Taxation that affects Investment
Money Supply (MS)
- If the FED increases MS, temporary surplus of money will occur at 5% interest; surplus would cause the rate to fall to 2%
Tight Money - Contractionary - Inflation
- Sell bonds, less money, MS decreases
Easy Money - Expansionary - Recession
- Buy bonds, more money, MS increases
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