ECN 204 Lecture Notes - Lecture 15: Open Market Operation, Excess Reserves, Monetary Policy
16 Aug 2017
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The market for money and the determination of interest rate. The demand for money: transactions demand, dt, demand for money as a medium of exchange. If the quantity demanded exceeds the quantity supplied, people will sell assets like bonds to get money. This causes bond supply to rise, bond prices fall and a higher market rate of interest. If the quantity supplied exceeds the quantity demanded, people reduce money holdings by buying other assets like bonds. Bond prices rise, and lower market rates of interest result. Interest rate: the price paid for the use of money, equilibrium interest rate, demand for money combined with supply of money determine the equilibrium rate of interest. Interest rates and bond prices: when the interest rate increases, bond prices fall; and vice versa, example, a ,000 bond pays annual interest. Interest rate rises to 7. 5%, bond prices will fall to /7. 6% = .
