The Money Market

Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded

What happens to the quantity demanded of money when interest rates increases?
Quantity demanded falls because individuals would prefer to have interest earning assets instead of borrowed liabilities

What happens to the quantity demanded when interest rates decrease?
Quantity demanded increases. there is no incentive to convert cash into interest earning assets.

Money Demand Shifters:

1. Change in price level 
2. Changes in income 
3. Changes in taxation that affects investment. 

Money Supply:

• If the FED increases the money supply, a temporary surplus of money will occur at 5% interest. 
• The surplus will cause the interest rate to fall to 2%. 

Increase money supply -> decreases interest rates -> Increases inv