Question

Which of these variables is  not a variable in the equation for the asset market equilibrium condition?

		Real income
		Real interest rate
		Saving
		Expected rate of inflation

Answer 1

THE MONEY MARKET:

• The money market uses the money demand and money supply.the condition for equilibrium in the money market is:

M^s=M^d

• Alternatively,equilibrium using the supply of real money and the demand for real money:

M^s/P=L(R,Y)

• This equilibrium condition will yeild an equilibrium nominal interest rate R.
• when there is excess supply of money,there is an excess demand for alternative interest bearing assets.
• people holding excessive money balances are willing to acquire interest bearing assests at lower interest rate.
• Potential money holder are more willing to hold additional quantities of money as the interest rate falls.
• When there is an excess demand for money there is an excess supply of interest bearing assest.
• People who desire money but do not have access to it are willing to sell off assets that offer higher nominal inerest rate in return for money balances that they desire.
• Those with money balances are more willing to give them up in return for interest bearing assests as the interest rate on these assets rises and as the opportunity cost of holding money rises.

Thus,expected rate of inflation is not a variables in the asest of market equilibrium condition.