Modeling Open Market Operations

Modeling Open Market Operations - Modeling Open Market...

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Modeling Open Market Operations I n t e r e s t R a t e M D M S Q o f M o n e y B o n d P r i c e Q o f B o n d s D B S B I n t e r e s t R a t e M D M S Q o f M o n e y L o a n a b l e F u n d s Q o f L o a n a b l e F u n d s D L F S L F i i i * M S * S L F * i * P ' We begin by assuming that there are only two types of financial assets; money and bonds. We will assume that bonds pay interest but money does not. If you can only own money or bonds, and you are content with the share of your financial assets that you have in bonds, then it has to be that you are also content with the share you have in the form of money. In other words, if the bond market is in equilibrium then so is the money market and we really only need to focus on either the money market or the bond market but not both. In the top part of the above graph, there is a particular bond price (P’) which makes the quantity demanded of bonds equal to the quantity of bonds supplied.
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