The money market

Money Market

• A market where Fed and users of money interact this determining the nominal interest rate (i%)
• Money demand (AD) comes from households, firms, government and the foreign sector
• Money supply (MS) is determined only 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

• Determined by Federal Reserve because the Fed has monopoly control over the supply of money