Unit 4: Money Market + Loan-able Funds

                                               


Money Market

• It is the Market where the Fed and the users of money interact, thus determining the nominal interest rate. 

Money Demand 

• Comes from households, Firms, the Government, and the Foreign Sector.

Money Supply

• Determined only by the Federal Reserve

Types of Money Demand

• Transaction Demand
• Demand for Cash

Asset Demand

• Demand for money as a store value
• Depended upon the Interest Rate

Total Money Demand

• It is downward sloping because of high-interest rates people are less inclined to hold money and more inclined to hold stocks and bonds.
• Money supply is vertical because it is independent of Interest Rates. 

Expansionary Monetary Policy 

• Money Supply moves to the right
• Reserve Ratio Decreases
• Discount Rate Decreases
• Buy Bonds
• More Money
• Money Supply Increases

Contractionary Monetary Policy

• Money Supply shifts left 
• Reserve Ratio Increases 
• Discount Rate Increases
• Sell Bonds 
• Less Money 
• Money Supply decreases 

Loanable Funds 

• A market where buyers and savers meet to exchange bonds at the real interest rate 
• Both the demand and supply of loanable funds comes from households, firms, the Government and the Foreign Sector.