Download Macro_Module_28 money market

Module 28
The Money
Market
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• What the money demand curve is
• Why the liquidity preference model
determines the interest rate in the short
run
The Demand for Money
• Why do you have $$$$ in your pocket?
To buy things!!!
• What else can you do with $$$$$?
Save!!!
• What would make you interested in saving?
High Interest Rate!!!!
The Opportunity Cost of Holding
Money
• What is the Opportunity Cost of holding $$$?
• The interest you earn when you save the $$$.
Higher short-term interest rate
=
Higher OC of holding the $$$
The Money Demand Curve
• No inflation in short-term
• Nominal Interest Rate =
Real Interest Rate
• Rising Interest Rates =
higher OC = Q of Money
demanded falls
• Movement along the
curve is caused by a
change in the Nominal
Interest Rate
Shifts of the Money Demand
Curve
• ∆ Price Level – Right shift
when higher P
• ∆ Real GDP – right shift
when GDP increases
• ∆ Technology – left shift
with ATM, credit cards,
online banking
• ∆ Institutions – left shift
when regulations make it
more attractive to keep
$$$ in bank
The Equilibrium Interest Rate
• Money Supply – Fed
determines a fixed
amount = vertical line
• MS is independent of the
Interest Rate
The Equilibrium Interest Rate
Liquidity Preference Model of the Interest Rate
What would happen to Interest
Rates and QM demanded when
There is a rate above i*?
i1 > i* then
Qs exceeds Qd
i1
Falling interest rates Qd
Closer to M*
The Equilibrium Interest Rate
Liquidity Preference Model of the Interest Rate
What would happen to Interest
Rates and QM demanded when
There is a rate below i*?
i1 < i* then
Qd exceeds Qs
Rising interest rates
Get Qd closer to M*
i1
Two Models of the Interest Rate