March 22, 2017

The Money Market

• Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded (vise versa):
• When interest rates rise, the quantity demanded of money falls because individuals would prefer to have interest earning assets instead of borrowed liabilities.
• When interest rates fall, quantity demanded increases. No incentive to convert cash into interest earning assets.

Money Demand Shifters

1. Change in the Price Level
2. Change in Income
3. Change in Taxation that affects investment