Money
Market- 03/23/17
-Demand for money has an inverse relationship between
nominal interest rates and the quality of money demanded
1) What happens to the quantity demanded of the money when interest rates increase?
-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
2) What happens to the quantity demanded when interest rates decrease?
-Quantity demanded increase
-There is no incentive to convert cash into interest earning assets.
The Determinants for Money
1) Changes in price level
2) Changes in income
3) Changes in taxation that affects investment
Increasing the money supply
- increase money supply à Decreases interest rates à Increases investment à Increases AD
1) What happens to the quantity demanded of the money when interest rates increase?
-Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities
2) What happens to the quantity demanded when interest rates decrease?
-Quantity demanded increase
-There is no incentive to convert cash into interest earning assets.
The Determinants for Money
1) Changes in price level
2) Changes in income
3) Changes in taxation that affects investment
Increasing the money supply
- increase money supply à Decreases interest rates à Increases investment à Increases AD
Fractional Reserve System
- Demand deposits are created
- The process in which banks hold a small portion of their deposits in reserves and they loan out the excess
- Banks keep cash on hand (RR) to meet depositors needs
- Banks must keep reserve deposits in their vaults or at their district FED
- Total Reserves ( total funds held by the bank) equals to Required Reserves + Excess Reserves
- Banks can only lend out their excess reserves
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