Unit 4 Notes - Money Market
·· What is the Money Market?
The market where the Fed and the users of money
interact thus determining the nominal interest rate
·
Money Demand (DM or MD) comes from households,
firms, the government and the foreign sector
·
Money Supply is determined only by the Federal
Reserve
·
Types of Money Demand –
1.
Transaction Demand – Demand for the dollar as a
medium of exchange
2.
Asset Demand – Demand for money as a store of
value. It is dependent upon the interest rate
·
Total Money Demand – Downward sloping because at
high interest rates, people are less inclined to hold money and more inclined
to hold stocks and bonds
fKey Things to Remember -
· Money Supply is VERTICAL because it is independent of the interest rate
You're missing expansionary monetary policy and contractionary monetary policy! It's important to know that expansionary monetary policy the Fed buys bonds which creates more money therefore money supply increase, so money supply shifts to the right. Along with that interest rate decreases and so do reserve ratio & discount rate. It's the complete opposite for contractionary monetary policy. In the contractionary monetary policy the Fed sells bonds which takes money away from the money supply so it decrease and it shifts to the left. Interest rate, reserve ratio and discount rate increase!
ReplyDeleteIt is important to know about the difference between the Federal Funds Rate and Discount Rate. The discount rate is the higher and is from bank to Fed. The FFR is from bank to bank on overnight loans.
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