Unit 4- Money Market

The Money Market

• The market where the Fed and the uses of money interact thus determining the nominal interest rate (i%)
• Money Demand (MD) comes from households, firms, government and the foreign sector.
• The Money Supply (MS) is determined by the Federal Reserve 

Money Demand

• Transaction Demand: demand for money as a medium of exchange (independent of the interest rate)
• Asset Demand: demand for money as a store of value (dependent on the interest rate)
• Total Money Demand: MD is downward sloping because at high interest rates people are less inclined to hold money and more inclined to hold stocks and bonds. At lower interest rates people sacrifice less when they hold money.

• Money supply is determined by the Federal Reserve because the Federal Reserve has monopoly control over the supply of money.