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Demand, Supply, and Equilibrium in The Mong Market

24 April, 2015 - 11:52

Learning Objectives

  • Explain the motives for holding money and relate them to the interest rate that could be arned from holding alternative assets, such as bonds.
  • Draw a money demand curve and explain how changes in other variables may lead to shifts in he money demand curve.
  • Illustrate and explain the notion of equilibrium in the money market.
  • Use graphs to explain how changes in money demand or money supply are related to changes n the bond market, in interest rates, in aggregate demand, and in real GDP and the price level.

In this section we will explore the link between money markets, bond markets, and interest rates. We first look at the demand for money. The demand curve for money is derived like any other demand curve, by examining the relationship between the “price” of money (which, we will see, is the interest rate) and the quantity demanded, holding all other determinants unchanged. We then link the demand for money to the concept of money supply developed in the last chapter, to determine the equilibrium rate of interest. In turn, we show how changes in interest rates affect the macroeconomy.