6.5: The Money Market
Graphical representations of money markets are visualizations of a combination of an economy's transactional demands plus an economy's asset demands. By way of introduction to this subunit, individuals and organizations face choices regarding what they can do with their money. In terms of spending as it relates to what is known as the money market, individuals and organizations can buy stocks, bonds, imports, foreign currencies, goods and services, and so forth.
One interpretation of the money demand curve is based on an economy's interest rate. This interpretation rests on the position of the supply of money and the interest rates on money. Regarding shifting factors, the money supply can increase based on lower interest rates or decrease based on higher interest rates.
6.5.1: Equilibrium Interest Rates
Watch this lecture, which discusses interest as rent for money. Be mindful that equilibrium interest rates are the balance or combination of the market for money plus the investment demand for money. Consequently, equilibrium real GDP and the price level will determine the equilibrium based on transactional demand and investment demand.
Watch this lecture about money supply and demand impacting interest rates.
6.5.2: Prices, Rates, and Linkages: Currencies, Stocks, and Bonds
Read this section about the exchange of currencies. Exchange rates relate the price of a country's own currency compared to the price of another country's currency mainly for the purpose of international trade. Trading partners need to convert their own currency into that of the country from which imports originate. For example, when the United States imports vehicles from Japan, the United States pays for them in Yen and needs to purchase that currency using US Dollars. In essence, the demand for and supply of currencies determine the exchange rate.
Read this article about the stock market and how expectations play a role in terms of changes in the price of a stock. Speculators tend to focus on changes in prices and attempt to sell at a price higher than they bought the stock. You will learn that a stock is a share of ownership in an organization, and its price is determined largely by the supply of and the demand for stocks in the stock market.
Read this article about bonds and some factors related to their prices. Like stocks, an objective is to sell at a higher price than that at time of purchase. Part of this effort entails focusing on current and anticipated interest rates. Unlike stocks, bonds take the form of loans. You will learn about a specific relationship that exists between bond prices and interest rates.