1. The Money Market Module 28

2. The Money Market 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples Just as we have a market for automobiles or oranges, we also have a market for money This market represents the amount of money people want to hold (M1) as opposed to investing.

3. The Demand for Money 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples How much money people want to hold (money demand) is going to be influenced by the interest rate As the interest rate increases, the opportunity costs of holding money (rather than investing) become greater

4. The Money Demand Curve 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples

5. Shifts in Money Demand 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples

6. Shifts in Money Demand 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples Changes in aggregate price level – If prices increase, people will need more money to cover spending Changes in GDP – As GDP increases, people will spend more thus requiring more money

7. Shifts in Money Demand 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples Changes in technology – As technology allows purchases to be made without the use of money, money demand goes down Changes in Institutions/Regulations – Some regulations/practices might make it more attractive for people to keep money in checking accounts rather than investing

8. Money & Interest Rates 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples Interest rates will be influenced by shifts in both money demand and money supply The equilibrium point determines the effective interest rate

9. Money Supply 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples

10. Liquidity Preference Model 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples This method of determining the interest rate is known as the liquidity preference model Interest rates will change with money demand and money supply Importantly, this model deals with nominal interest rates. Long term interest rates can behave differently

11. Examples 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples What will happen to the money demand, money supply and nominal interest rate if 1.The Federal Reserve sells Treasury Bonds 2.The Price Level falls

12. Examples 1) The Demand for Money - Opportunity Costs - Money Demand Curve - Shifts in Money Demand 2) Money & Interest Rates - Money Supply - Liquidity Preference Model 3) Examples What will happen to the money supply and nominal interest rate if 1.The Federal Reserve lowers the reserve rate 2.The economy enters recession