are equivalent –they pay interest and cannot be accessed at any time.The proportions of money and ‘bonds’ you wish to hold depend on your level of transactions and the interest rate on bonds. 4-1
Money Demand, Money Supply; and the Equilibrium Interest RateThe interest rate must be such that the supply of money (which is independent of the interest rate) be equal to the demand for money (which does depend on the interest rate).The Determination of the Interest Rate
Money Demand, Money Supply; and the Equilibrium Interest RateAn increase in nominal income leads to an increase in the interest rate, if the central bank keeps the money supply constant.The Effects of an Increase inNominal Income on the Interest Rate
Monetary Policy and Open-Market OperationsAn increase in the supply of money leads to a decrease in the interest rate.The Effects of an Increase in the Money Supply on the Interest RateEquivalently, if the central bank wants to lower the interest rate, it must increase the supply of moneyOpen-market operations, which take place in the “open market for bonds”, are the standard method central banks use to change the money stock in modern economies.
Monetary Policy and Expansionary Open-Market Operations
Determinants of the Demand and the Supply of Central Bank Money]]In equilibrium, the supply of central bank money (H) is equal to the demand for central bank money (Hd):Or restated as:HHdH = [ c+ (1-c) ] $Y L(i)