| MACRO -- Unit 4, Topic 4.5 |
ESSENTIAL KNOWLEDGE
The demand for money shows the inverse relationship between the nominal interest rate and the quantity of money
people want to hold.
Show the above statement on the Money Supply graph by drawing a black dot on one point on the MD curve
and another point higher or lower along the curve.
Be able to explain that there is an inverse relationship between the nominal rate and the quantity of money people
want to hold. When nominal interest rate increases, the quantity of money people want to hold
decreases. When nominal interest rate decreases, the quantity of money people want to hold increases.
If individuals are not making enough interest on their wealth-bearing accounts, they prefer to hold on to
their money for other types of demand for money shown in the next section below.
When graphing the Money Market Graph, the x axis is labeled at Q$. This indicates the amount of money people
want to hold.
The demand for money is the total amount of money that the population of an economy wants to hold.
Individuals and firms hold on to money for three reasons:
Transactionary Demand--demand for money required for current transactions of individuals and firms.
Precautionary Demand--demand for money as a precaution against an uncertain future (i.e., auto repairs,
unforeseen bills, home or business repairs, etc.)
Speculative Demand--demand for money as a store of wealth (i.e., bonds)
As nominal interest rates FALL, the quantity of money people hold on to increases as the interest rate of
storing wealth (interest-bearing accounts, i.e. bonds) decreases.
As nominal interest rates RISE, the quantity of money people hold on to decreases as the interest rate of
storing wealth (interest-bearing accounts, i.e. bonds) increases.
Given a monetary base determined by a country’s central bank, money supply is independent of the nominal
interest rate.
On a Money Market graph the money supply is vertical because the money supply stays the same unrelated
to the nominal interest rate. At this period of time, there is only so much money (M1) in the supply of money,
so the MS doesn't change when there is a change in the nominal interest rate.
In the money market, equilibrium is achieved when the nominal interest rate is such that the
quantities demanded and supplied of money are equal.
The equilibrium price of money (nominal interest rate) is where MS = MD (see money market graph).
Disequilibrium nominal interest rates create surpluses and shortages in the money market. Market forces
drive nominal interest rates toward equilibrium.
When the nominal interest rate is ABOVE equilibrium this indicates the quantity of MS is > than the quantity
of MD. This creates a SURPLUS which drives the price of money (the nominal interest rate) to FALL to
equilibrium where MS = MD. Show on the interactive Money Market Graph.
When the nominal interest rate is BELOW equilibrium this indicates the quantity of MD is > than the quantity of
MD. This creates a SURPLUS which drives the price of money (the nominal interest rate) to FALL to equilibrium
where MS = MD. Show on the interactive Money Market Graph.
Factors that shift the demand for money, such as changes in the price level, and supply of money, such as monetary
policy, change the equilibrium nominal interest rate.
Factors that shift demand for money are:
Change in the Price Level--as the PL rises, consumers demand more money to purchase more G & S.
Change in Real GDP--as RGDP rises, income rises and people demand more money to purchase more G&S.
Change in National Income (Y)--as Y rises people demand more money to purchase more G&S.
Change in Expectations of the Future--as people expect inflation to rise, they purchase more.
The demand for money shows the inverse relationship between the nominal interest rate and the quantity of money
people want to hold.
Show the above statement on the Money Supply graph by drawing a black dot on one point on the MD curve
and another point higher or lower along the curve.
Be able to explain that there is an inverse relationship between the nominal rate and the quantity of money people
want to hold. When nominal interest rate increases, the quantity of money people want to hold
decreases. When nominal interest rate decreases, the quantity of money people want to hold increases.
If individuals are not making enough interest on their wealth-bearing accounts, they prefer to hold on to
their money for other types of demand for money shown in the next section below.
When graphing the Money Market Graph, the x axis is labeled at Q$. This indicates the amount of money people
want to hold.
The demand for money is the total amount of money that the population of an economy wants to hold.
Individuals and firms hold on to money for three reasons:
Transactionary Demand--demand for money required for current transactions of individuals and firms.
Precautionary Demand--demand for money as a precaution against an uncertain future (i.e., auto repairs,
unforeseen bills, home or business repairs, etc.)
Speculative Demand--demand for money as a store of wealth (i.e., bonds)
As nominal interest rates FALL, the quantity of money people hold on to increases as the interest rate of
storing wealth (interest-bearing accounts, i.e. bonds) decreases.
As nominal interest rates RISE, the quantity of money people hold on to decreases as the interest rate of
storing wealth (interest-bearing accounts, i.e. bonds) increases.
Given a monetary base determined by a country’s central bank, money supply is independent of the nominal
interest rate.
On a Money Market graph the money supply is vertical because the money supply stays the same unrelated
to the nominal interest rate. At this period of time, there is only so much money (M1) in the supply of money,
so the MS doesn't change when there is a change in the nominal interest rate.
In the money market, equilibrium is achieved when the nominal interest rate is such that the
quantities demanded and supplied of money are equal.
The equilibrium price of money (nominal interest rate) is where MS = MD (see money market graph).
Disequilibrium nominal interest rates create surpluses and shortages in the money market. Market forces
drive nominal interest rates toward equilibrium.
When the nominal interest rate is ABOVE equilibrium this indicates the quantity of MS is > than the quantity
of MD. This creates a SURPLUS which drives the price of money (the nominal interest rate) to FALL to
equilibrium where MS = MD. Show on the interactive Money Market Graph.
When the nominal interest rate is BELOW equilibrium this indicates the quantity of MD is > than the quantity of
MD. This creates a SURPLUS which drives the price of money (the nominal interest rate) to FALL to equilibrium
where MS = MD. Show on the interactive Money Market Graph.
Factors that shift the demand for money, such as changes in the price level, and supply of money, such as monetary
policy, change the equilibrium nominal interest rate.
Factors that shift demand for money are:
Change in the Price Level--as the PL rises, consumers demand more money to purchase more G & S.
Change in Real GDP--as RGDP rises, income rises and people demand more money to purchase more G&S.
Change in National Income (Y)--as Y rises people demand more money to purchase more G&S.
Change in Expectations of the Future--as people expect inflation to rise, they purchase more.
Money Supply Graph (2:16 minutes)
https://reffonomics.com/13AMoneyMarketGraphB.html
Movie (Silent) (4:25 minutes):
https://reffonomics.com/MovieMoneyMarket2020.html
eTextbook--The Money Market Graph
https://reffonomics.com/MoneyMarketGraph2BRAeconomics2021.html
Money Market on the CED (know what is on the May exam):
https://reffonomics.com/2022MoneyMarketandQuestions.html
An increase in the money supply is expansionary monetary policy to close a
recessionary gap or negative output gap.
A decrease in the money supply is contractionary monetary policy to close an
inflationary gap or positive output gap.
https://reffonomics.com/2022moneymarketANDasad.html
https://reffonomics.com/SaolaASADandMoneyMarketGraphs.html
https://reffonomics.com/SaolaMoneyMarketGraphFINAL.html
https://reffonomics.com/13AMoneyMarketGraphB.html
Movie (Silent) (4:25 minutes):
https://reffonomics.com/MovieMoneyMarket2020.html
eTextbook--The Money Market Graph
https://reffonomics.com/MoneyMarketGraph2BRAeconomics2021.html
Money Market on the CED (know what is on the May exam):
https://reffonomics.com/2022MoneyMarketandQuestions.html
An increase in the money supply is expansionary monetary policy to close a
recessionary gap or negative output gap.
A decrease in the money supply is contractionary monetary policy to close an
inflationary gap or positive output gap.
https://reffonomics.com/2022moneymarketANDasad.html
https://reffonomics.com/SaolaASADandMoneyMarketGraphs.html
https://reffonomics.com/SaolaMoneyMarketGraphFINAL.html
| HOMEWORK ASSIGNMENTS: |
| TOPIC 4.5: THE MONEY MARKET |
| Steven M. Reff Economics Lecturer University of Arizona (2007 - 2016) The 2015 University of Arizona Five-Star Faculty Award |
Reffonomics Baseball Game--Money Market Graph and ASAD Graph:
https://reffonomics.com/ReffonomicsBaseballMoneyMarketandASAD2RAeconomics2021.html
Money Market FRQs (know what is on the May exam):
https://reffonomics.com/FRQUnit4MACROMoneyMarketRAeconomics2021.html
Money Market Graphing (COVID-19):
https://reffonomics.com/onlinegraphsMoneyMarketRAeconomics2021.html
https://reffonomics.com/ReffonomicsBaseballMoneyMarketandASAD2RAeconomics2021.html
Money Market FRQs (know what is on the May exam):
https://reffonomics.com/FRQUnit4MACROMoneyMarketRAeconomics2021.html
Money Market Graphing (COVID-19):
https://reffonomics.com/onlinegraphsMoneyMarketRAeconomics2021.html
| MORE HOMEWORK ASSIGNMENTS: |
| See Below What Knowledge is Required for Your May Exam!!! |