Unit 7 Money Market Loanable Fund Market - .if: ?i. it I, !...

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.if:?i.itI,!IFThe Money MarketThe money market consists of the demand for money (MD) and the supply of money (MS). TheFed determines the quantity of money supplied. Since it is determined by the Fed, the money supply isindependent of the interest rate, and the money supply curve is a verticalline.[] Transactions demand-- to make purchases of goods and services[] Precautionary demand -- to serve as protection against an unexpected need[] Speculative demand-- to serve as a store of wealthThe demand for money is a function of interest rates and income, The interest rate is the opportunitycost of holding money because it represents the forgone interest income that was given up in order tohold money. The demand for money has an inverse relationship with the interest rate. As the interest rateincreases, the opportunity cost of holding money increases and people hold less money. As the interestrate falls, the opportunity cost of holding money falls and people hold more money. The negatively slopeddemand curve for money represents the quantity of money demanded at various interest rates.The demand for money is based on a decision by consumers to hold wealth in the form of interest-bearing assets (e.g. savings accounts) or as money (noninterest-bearing). There are three types of moneydemand, based on the three basic motives people have for holding money (rather than interest-bearingassets).The quantity of money (e.g., M1) is determined by the Federal Reserve (the Fed) through its control ofthe reserve requirement and money creation by the banldng system. The price of money is the interestrate. The interest rate is the price of money because it is what borrowers must pay to obtain moneyand it is also the opportunity cost of holding rdoney rather than loaning it out.I, i,'I)!i ii!I";-i'!ÿi '.i• :4;iFigure 4-4.1The Money MarketWrr i*woÿwMSMD..,QUANTITY OF MONEYAdvanced Placement Economics Macroeconomics: Student Resource Manual © Council for EconomAc Education, New York, N,Y,137"Ii:i\1i'l";.,I. Ii}, ,:I:iI:i:!1"4'!i.! .
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Chapter 15D / Exercise 2
Macroeconomics
Roger A. Arnold
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Macroeconomics
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Chapter 15D / Exercise 2
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