2. To hold wealth as money OR interest bearing accounts, individuals must decide. Holding money means no interest that could be earned if the money was in an interest bearing account (opportunity cost)

3. Transaction demand Precautionary demand Speculative demand

4. Most households and businesses need money on hand for purchases, bill paying, etc. Money demanded for use as a medium of exchange. Depends on GDP, not interest rates.

5. Another reason individuals and business want to hold money is because of it’s function as a store of value. Money is the most liquid of all financial assets and holds it’s value when other financial assets (like stocks and bonds) are expected to decline. Disadvantage: earns little or no interest

6. Varies inversely with the interest rate. Asset Demand is often subdivided: Precautionary Demand Speculative Demand

7. Holding money as a safeguard against some unexpected need Holding money as a store of wealth

8. The sum of the demand for money makes the Demand curve for money D m. D m is downward sloping.

9.  Determined by the Fed.  NOT dependent on the interest rate  Moves left or right as Fed increases or decrease the money supply

10. Interest Rate Money SmSm DmDm ir*

11.  What might cause the demand for money to change? Price rise: every needs more money to meet their transaction needs. So the Dm increases and the interest rate rises  Income Increase: obviously there is a Dm increase and the interest rate rises.

12.  The Loanable Funds Market is NOT the same as the Money Market “ loanable funds” refers to the demand and supply of funds for lending. The demand for loanable funds comes from those who want to borrow: consumers, government, business, foreigners The supply of loanable funds comes from the willingness of to save. It DOES depend on the interest rate ( which the Sm in the money market does NOT).

13.  Demand is downward sloping because more loans are demanded when the real interest rate is lower and fewer are demanded at higher rates.  The supply is upward sloping because higher interest rates are an incentive to save more and forgo spending (opportunity cost).  The determinants of t Demand for loanable funds are: business and consumer confidence and expectations, government budget plans, income levels.

14. Real Interest Rate S lf D lf Quantity of loanable funds Q lf i

15.  Determined by the Fed.  NOT dependent on the interest rate  Moves left or right as Fed increases or decrease the money supply