AP Macroeconomics AMSCO Guided Notes
4.5: The Money Market
AP Macroeconomics Guided Notes
AMSCO 4.5 - The Money Market
Essential Questions
- How do the demand for and supply of money determine the equilibrium nominal interest rate and influence the value of other financial assets?
I. The Demand for Money
1. What is liquidity preference and how does it relate to the demand for money?
2. What are the two functions of money that help explain why people demand it?
3. What are the three motives for holding money and what does each represent?
II. Other Determinants of the Demand for Money
A. Level of Income and Real GDP
1. How do changes in income and real GDP affect the demand for money?
B. Price Level
1. What is the price level and how does inflation or deflation affect the demand for money?
C. Expectations
1. How do expectations about bond prices influence the demand for money?
D. Transfer Costs
1. How do transfer costs between money and nonmoney deposits affect the demand for money?
E. Preferences
1. How do individual preferences regarding liquidity and risk affect the demand for money?
III. Interest Rates and the Demand for Money
1. What is the relationship between nominal interest rates and the quantity of money demanded?
2. Why does the demand curve for money slope downward and what causes it to shift?
IV. The Money Supply
1. What is the role of central banks and how does the Federal Reserve control the money supply?
2. What are the three basic tools the Fed uses to influence the money supply and how does each work?
V. Equilibrium and Disequilibrium in the Money Market
1. What is the money market and what condition defines equilibrium in the money market?
2. How do nominal interest rates adjust when the money market is in disequilibrium?
A. Changes in the Demand for Money
1. How do changes in the demand for money affect the money demand curve and nominal interest rates?
B. Changes in the Money Supply
1. What happens to nominal interest rates and bond prices when the Fed increases the money supply?
2. What happens to nominal interest rates and bond prices when the Fed decreases the money supply?
Key Terms
liquidity
speculative demand for money
monetary supply
money market