Money market

The Money Market :

The money market is where the Federal Reserve and the users of money interact, thus determining the nominal interest rate (i%).

It is composed of two parts:

- Money demand (MD) comes from households,
firms, government, and the foreign sector.

- Money supply (MS) is determined only
by the Federal Reserve.


Parts of Money Demand :

Transaction demand :is the demand for money as a medium of exchange (independent of interest rate).

Asset demand : is the demand for money as a store of value (dependent of 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.