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

2. 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

3. 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

4. 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

5. 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

6. 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

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