The Money Market Keep that Money in Your Pocket or Should You Save It?

Money Demand Curve: Slope Money Demand curve, MD The money demand curve is downward sloping. Why? Interest rate, r Quantity of money

Shifts of the Money Demand Curve 1.Changes in the Aggregate Price Level a.Why would aggregate price level changes shift the demand for money? 2.Changes in Real GDP a.As the economy gets stronger, real incomes rise with real GDP i.The larger the quantity of goods and services we buy the larger the quantity of money we will want to hold at any given interest rate. 3.Changes in Technology a.Technological advances have decreased the demand for money. i.Like what? 4.Changes in institutions a.Government regulations can affect the demand for money i. So can instability (Venezuela example)Venezuela example

Money Demand Curve: Shifts in the Curve Left shift of the money demand curve = decrease in demand for money Right shift of the money demand curve = increase in demand for money MD 2 MD 3 MD 1 Interest rate, r Quantity of money

H The Money Market: Equilibrium 1. The Fed picks a level of money supply… MD M rHrH rErE E Money supply curve, MS Money supply chosen by the Fed 2. …which then sets the equilibrium interest rate at E. 3. At point L, the quantity of money demanded exceeds the money supply AND the quantity of non- moneys supplied is greater than those demanded. L rLrL --Loaners will have to raise their interest rates to attract investors. Interest rate, r Quantity of money MLML MHMH Equilibrium 4. At point H, the quantity of money demanded is less than the money supply AND the demand for non- moneys is greater than the quantity supplied. --Loaners can lower their interest rates and still attract investors.