Money Market

Explanation

The Money Market illustrates the demand and supply for money. Money is demanded by households, and it is supplied by banks.

In this space, an explanation of the desired shift will appear.

Income can be thought of as a normal good: as one's income increases, people demand more money at each interest rate. As the real GDP increases throughout the economy, the demand for money increases.

Income can be thought of as a normal good: as one's income decreases, people demand less money at each interest rate. As the real GDP decreases throughout the economy, the demand for money decreases.

As the price level of goods and services increase, people demand more money to consume these goods.

As the price level of goods and services decrease, people demand less money to consume these goods.

Consumers have their own expectations about future price levels. If consumers expect price levels to increase, the demand for money increases in order to consume while their money has more value.

Consumers have their own expectations about future price levels. If consumers expect price levels to decrease, the demand for money decreases in order to consume when their money has more value in the future. Their money is less valuable now.

Transfer costs are the costs associated with switching from money to non-money deposits. As transfer costs increase, the demand for money increases because consumers will choose to make less frequent transfers.

Transfer costs are the costs associated with switching from money to non-money deposits. As transfer costs decrease, the demand for money decreases because consumers will choose to make more frequent transfers.

If consumers prefer money over non-money, the demand for money increases.

If consumers do not prefer money, the demand for money decreases.

If the Federal Reserve Bank buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public

If the Federal Reserve Bank sells bonds in the open market, it decreases the money supply in the economy by removing cash from the economy in exchange for bonds.

Demand for Money

  1. Real GDP
  2. Price Level
  3. Expectations of Price Levels
  4. Transfer Costs
  5. Preferences

Supply for Money