Money Market Why do people demand to hold money? How do interest rates affect...

Money Market

Why do people demand to hold money?

How do interest rates affect demand?

Know how the chain of events works when the Fed decides to affect market outcomes.

Fed Action à MS changes à Interest rate changes à Investment changes àAD changes à Prices/Output changes

How much of an effect does a change in interest rates have on aggregate demand.

What are some of the constraints on monetary policy?

Relate to the Great Depression.

Liquidity Trap

**How do views of Monetarists differ from Keynesians?

*Understand MV = PQ

Solutions

Expert Solution

1. People hold money for different reasons. One of the reason is for transaction purpose. In order to meet daily transaction for purchasing goods and services, people hold liquid money. basically liquid money is used in small amount of transaction such as buying grocery products or paying rent, visiting doctor for illness etc. Second reason is precautionary demand for money. For sudden need of money or cash for different household purpose, people hold money. The third need is speculative demand for money as depicted by Keynes. In the face of falling bond prices, the bond holders try to convert the bond into money to avoid loss in value of bond.

2. Interest rate has negative relation with the demand for money. As interest rate offered by financial institution rises, demand for money held by people decreases. Increasing rate of interest brings an extra income for the people, hence, money holding is like an opportunity cost to people. On the other hand, if interest rate is very high, demand for bond increases as people think that interest rate may fall shortly. People demand more money to purchase bonds.

3. The equation of aggregate demand is AD = C+ I + G

When interest rate falls, demand for investment in the economy rises as investment is a function of interest rate. Investment in different sector of the economy rises and in turn, economy expands as well as the per capita income of household increases. As disposable income rises, it induces aggregate demand to rise.

4. Monetary policy means control of money supply and demand in the economy by federal bank using different monetary tools. According to Keynes Monetary policy is ineffective when there occurs an even like liquidity trap. When People wish to hold any amount money supplied in the market at a given interest rate. In the other words, demand for money is completely elastic represented by horizontal LM curve. Increase or decrease in money supply hence do not affect the interest rate and therefore the aggregate investment and consumption spending remain unaffected. Monetary policy remains ineffective.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

1. Why do people hold money? 2. What are the tools of monetary policy and how...

1. Why do people hold money? 2. What are the tools of monetary policy and how can the Federal Reserve apply these in a recessionary environment?

1. Why do people hold money? 2. What are the tools of monetary policy and how...

1. Why do people hold money? 2. What are the tools of monetary policy and how can the Federal Reserve apply these in a recessionary environment? elaborate and the chapter is called the federal reserve system and monetary policy

1. Why do people hold money? What are the tools of monetary policy and how can...

1. Why do people hold money? What are the tools of monetary policy and how can the Federal Reserve apply these in a recessionary environment?

Using a supply-and-demand graph for the market for money, model how interest rates would change if...

Using a supply-and-demand graph for the market for money, model how interest rates would change if the Federal Reserve announced that it was increasing the required reserve ratio.

Under the liquidity preference (money market) framework, how will the following events affect real interest rates?...

Under the liquidity preference (money market) framework, how will the following events affect real interest rates? Show your answer using graphs. The economy enters a recession. The Federal Reserve decreases the nominal money supply. The price level decreases. The price level and the nominal money supply both decrease by 17 percent.

why do company hold money

Why does the money multiplier change if people hold cash? How does it change? If people...

Why does the money multiplier change if people hold cash? How does it change? If people start holding more cash now than they did in the past, is monetary policy more effective or less effective? Draw a graph to show this effect.

1) How do fiscal and monetary policy affect interest rates in our economy? 2) Why do...

1) How do fiscal and monetary policy affect interest rates in our economy? 2) Why do interest rates affect bond prices? Explain.

Explain why people demand for money and how demand for money would have been influenced by...

Explain why people demand for money and how demand for money would have been influenced by Covid-19 epidemic?

How do interest rates affect our lives? Interest rates are one way to express the price,...

How do interest rates affect our lives? Interest rates are one way to express the price, or cost, of money obtained from someone else. For example, your credit card lends you money every time you make a purchase. Think about how interest rates affect your personal financial behavior with regard to spending and saving. Think also about the relationship between changing interest rates and longer-term interest-bearing securities (bonds, mortgages, etc.), and how interest rates affect our lives in general. Answer...

Subjects