Demand, Supply, and Equilibrium in the Money Market
We have discussed the role of supply and demand in the money market, and we have seen how it has an effect on interest rates as well. Here, you will learn how transfer costs and expectations can affect demand. What is Keynes' theory with regard to the relationship between investment in bonds and money?
Equilibrium in the Market for Money
The money market is the interaction among institutions through which money is supplied to individuals, firms, and other institutions that demand money. Money market equilibrium occurs at the interest rate at which the quantity of money demanded is equal to the quantity of money supplied. Figure 25.8 "Money Market Equilibrium" combines demand and supply curves for money to illustrate equilibrium in the market for money. With a stock of money (M), the equilibrium interest rate is r.
Figure 25.8 Money Market Equilibrium
The market for money is in equilibrium if the quantity of money demanded is equal to the quantity of money supplied. Here, equilibrium occurs at interest rate r.