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AP Economics

AP Economics. Mr. Bernstein Module 28: The Money Market February 2019. AP Economics Mr. Bernstein. The Money Market Objectives - Understand each of the following: What the money demand curve is Why the liquidity preference model determines the interest rate in the short run.

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AP Economics

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  1. AP Economics Mr. Bernstein Module 28: The Money Market February 2019

  2. AP EconomicsMr. Bernstein The Money Market • Objectives - Understand each of the following: • What the money demand curve is • Why the liquidity preference model determines the interest rate in the short run

  3. AP EconomicsMr. Bernstein The Opportunity Cost of Holding Money • You could be earning interest on the money! • Opportunity Cost therefore changes with interest rates • We use short-term rates as the cost • When we use the term money, we consider it to mean funds that will be used for transactions in the short term, not funds to be invested in longer term projects

  4. AP EconomicsMr. Bernstein The Money Demand Curve • Y axis is Nominal Rates, not Real • Downward sloping • Higher rates attract funds and reduce the demand for cash

  5. AP EconomicsMr. Bernstein Shifts in the Money Demand Curve • Shifts make money more desirable at any interest rate • D Price Levels • proportional • D Real GDP • D Banking Technology • ie ATMs reduce demand • D Banking Institutions • Instability reduces demand

  6. AP EconomicsMr. Bernstein Equilibrium Interest Rate: Liquidity Preference Model • Assumes fixed MS • At higher interest rates, individuals prefer CDs to money (cash), so demand for cash falls • At lower interest rates, demand for cash rises

  7. AP EconomicsMr. Bernstein Two Models of the Interest Rate • Liquidity Preference and Loanable Funds Market

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