ECON 105 Lecture Notes - Lecture 15: Foreign Exchange Market, Price Level, Financial Innovation

• School: Simon Fraser University
• Department: Economics
• Course: ECON 105
• Professor: Gulriz Barkin

Document Summary

Short-term interest rates are the interest rates on financial assets that mature within six months or less. Long-term interest rates are interest rates on financial assets that mature a number of years in the future. The quantity of money that people plan to hold depends on four main factors. The money demand curve shows the relationship between the quantity of money demanded and the interest rate. The interest rate is the opportunity cost of holding wealth in the form of money rather than an interest-bearing asset. When interest rates go up, quantity of money demanded. When interest rates decrease, the opportunity cost of holding money decreases and the quantity of money demanded. If prices double holding everything else constant, the quantity of money demanded. Financial innovation that lowers the cost of switching between money and interest-bearing assets decreases the quantity of money that people plan to hold.