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Task M3

The interest rate is determined by the equilibrium of money supply and money demand. The central bank determines the interest rate. Money demand depends on income, transactions, and the interest rate. The interest rate represents the opportunity cost of holding money because you could lend your money and earn interest instead of holding it. Money supply is determined by reserve requirements, bank reserves, and preferences for holding currency vs deposits. Commercial banks provide services, ensure stability, and promote growth. There is a negative relationship between money market interest rates and bond prices - higher rates on money markets means lower bond prices. The money multiplier describes how an initial deposit expands the money supply. It represents the ratio of change in money supply to

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18 views2 pages

Task M3

The interest rate is determined by the equilibrium of money supply and money demand. The central bank determines the interest rate. Money demand depends on income, transactions, and the interest rate. The interest rate represents the opportunity cost of holding money because you could lend your money and earn interest instead of holding it. Money supply is determined by reserve requirements, bank reserves, and preferences for holding currency vs deposits. Commercial banks provide services, ensure stability, and promote growth. There is a negative relationship between money market interest rates and bond prices - higher rates on money markets means lower bond prices. The money multiplier describes how an initial deposit expands the money supply. It represents the ratio of change in money supply to

Uploaded by

bendermacherrick
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Task M3

- Money demand motivates


- Opportunity cost
- Bond prices and bond yields
- Central Bank Money (Monetary Base)
- Money Multiplier
- How is the interest rate determined? And define money demand

The interest rate is determined by the equilibrium condition that the supply of money be equal to the
demand for money. The Central Bank determines the interest rate.
Demand for money refers to how much assets individuals wish to hold in the form of money. The
demand for money is related to income, level of transactions and the interest rate.

- Why does the interest rate represent the opportunity cost of holding money?

When you hold money, you don’t use the money. Instead of holding your money, you can lend your
money to anyone else and then receive interest for that. That is why the interest rate represent the
opportunity cost of holding money.

- What determines the money supply and what is the role of commercial banks?

The determinants of money supply are both exogenous and endogenous which can be described broadly
as: the minimum cash reserve ratio, the level of bank reserves, and the desire of the people to hold
currency relative to deposits. The last two determinants together are called the monetary base or the
high powered money.
Commercial banks have to provide services to the general public and business. They also have to ensure
the economic and social stability and the growth of the economy within a country.

- What is the relationship between the interest rate on the money market and the bonds
market?

Higher interest on money market, lower prices on bonds (less desirable because more interest on money
market.) So a negative relationship.

- What is the role of the money multiplier? What is the money multiplier?

The money multiplier describes how an initial deposit leads to a greater final increase in the total money
supply. Also known as “monetary multiplier,” it represents the largest degree to which the money supply
is influenced by changes in the quantity of deposits. It identifies the ratio of decrease and/or increase in
the money supply in relation to the commensurate decrease and/or increase in deposits.

1/Reserve ratio = Money multiplier


- If we include the fact that money demand depends on output, what does this mean for a
money equilibrium relation in the space of i vs Y?

Upward sloping curve, because when Y increases, interest rates need to go up, because people need to
save more to have the same demand (Md).

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