economy
The Money Market and The Interest RateDo people always want as much money as possible? YES. However, when we talk about demand we know that there are sacrifices that have to be given up, specifically every individual faces a constraint. So the demand for money is how much money people would like to hold, given the constraints that they face. Money is one of the forms in which people hold their wealth. At a given time, the total amount of wealth is given. If we want to hold more wealth in the form of money, we must hold less wealth in other forms - savings account, money market funds, time deposits, stocks, etc. An individual's quantity of money demanded is the amount of wealth that the individual chooses to hold as money, rather than as other assets. Why do people want to hold more money? The most important reason is that money is a means of payment. Other forms of wealth are not used for purchases. The other forms of wealth provide a financial return to their owners. Money, pays either zero (cash or non-interest bearing checking accounts) or very little (some types of checking accounts) interest. When you hold money, you bear an opportunity cost - the interest you could have ea
Shifts in the Money Demand CurveA change in the interest rate moves us along the money demand curve. We can do the exact opposite when there is an excess demand for money. Every dollar of this money is held by someone. When there is an excess supply of money in the economy, there is also an excess demand for bonds. The Economy Wide Demand for MoneyThe (economy wide) quantity of money demanded is the amount of total wealth in the economy that all households and businesses, together, choose to hold as money rather than bonds. When the interest rate is lower families find it more affordable to buy homes. The greater the interest rate, the greater the opportunity cost of holding money. The entire money demand cuve shifts rightward if th price level or income increases. Open market sales have the opposite effect: they withdraw reserves from the system and shift the money supply curve leftward by a multiple of the reserve withdrawal. If people want to hold less money than they are currently holding they must want to hold more in bonds. However, remember that the classical model only holds in the long-run. The money demand curve tells us how much money people want to hold at each interest rate. 3) Interest Rate - Interest payments are what you give up when you hold money - the opportunity cost of money. What happens when things change?Suppose the Fed wants to lower the interest rate. Now we can complete our last block from above.
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