Mr. Bernstein Module 28: The Money Market March 3, 2015 AP Economics Mr. Bernstein Module 28: The Money Market March 3, 2015

AP Economics Mr. Bernstein The Money Market Objectives - Understand each of the following: What the money demand curve is Why the liquidity preference model determines the interest rate in the short run

AP Economics Mr. Bernstein The Opportunity Cost of Holding Money You could be earning interest on the money! Opportunity Cost therefore changes with interest rates We use short-term rates as the cost When we use the term money, we consider it to mean funds that will be used for transactions in the short term, not funds to be invested in longer term projects

AP Economics Mr. Bernstein The Money Demand Curve Y axis is Nominal Rates, not Real Downward sloping Higher rates attract funds and reduce the demand for cash

AP Economics Mr. Bernstein Shifts in the Money Demand Curve Shifts make money more desirable at any interest rate D Price Levels proportional D Real GDP D Banking Technology ie ATMs reduce demand D Banking Institutions Instability reduces demand

AP Economics Mr. Bernstein Equilibrium Interest Rate: Liquidity Preference Model Assumes fixed MS At higher interest rates, individuals prefer CDs to money (cash), so demand for cash falls At lower interest rates, demand for cash rises

AP Economics Mr. Bernstein Two Models of the Interest Rate Liquidity Preference and Loanable Funds Market