THE MONEY MARKET
,We assume that there are only 2 types of assets, name
money and bonds.
We therefore define wealth as: W=M+B
where W=wealth; M=money & B=bonds
A bond is a promissory note by a borrower to pay the
lender a certain amount of money, called the principal
amount, at a specified date, and a given amount of
interest at regular intervals.
,Compared to bonds, money carries a lower rate of return.
The interest rate is simply the opportunity cost of holding idle money balanc
The higher the interest rate, the higher the opportunity cost of holding yo
wealth as money.
Therefore, when the interest rate increases, the opportunity cost of holding
wealth as money increases, the demand for money falls and the demand for
bonds increases.
This implies a positive relationship between bond demand and the interest ra
Like all other markets in the economy, the money market has a demand side
and a supply side.
, MONEY SUPPLY
,We assume that there are only 2 types of assets, name
money and bonds.
We therefore define wealth as: W=M+B
where W=wealth; M=money & B=bonds
A bond is a promissory note by a borrower to pay the
lender a certain amount of money, called the principal
amount, at a specified date, and a given amount of
interest at regular intervals.
,Compared to bonds, money carries a lower rate of return.
The interest rate is simply the opportunity cost of holding idle money balanc
The higher the interest rate, the higher the opportunity cost of holding yo
wealth as money.
Therefore, when the interest rate increases, the opportunity cost of holding
wealth as money increases, the demand for money falls and the demand for
bonds increases.
This implies a positive relationship between bond demand and the interest ra
Like all other markets in the economy, the money market has a demand side
and a supply side.
, MONEY SUPPLY
