EECS 1541 Lecture Notes - Lecture 23: Money Market, Aggregate Demand
23 Jun 2018
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EECS 1541 Lecture 23 Notes
Introduction
Global Integration of Money Market Interest Rates
Notice how the money market rates vary substantially among some currencies.
This variance is due to differences in the interaction between the country’s total supply
of short-term funds available (bank deposits) and that country’s total demand for short-
term funds by borrowers.
Normally, the money market interest rate paid by corporations that borrow short-term
funds in a given country is slightly higher than the rate paid by that country’s national
government.
The rate paid by the government is considered to be a risk-free rate by investors who
believe there is no risk of the government defaulting on the funds it borrows.
Corporations pay a higher rate because investors who supply the funds require it to
reflect the risk of corporate default on the borrowed funds.
Money market interest rates among countries tend to be highly correlated over time
because conditions that affect the supply and demand for short-term funds tend to
change in a similar manner among countries.
Normally these securities are perceived to be very safe, especially when they are rated
high by rating agencies.
And because the typical maturity of these securities is one year or less, investors are less
concerned about the issuer’s financial condition deteriorating by the time of maturity
than if the securities had a longer-term maturity.
When economic conditions weaken in many countries, the corporate need for liquidity
declines and so corporations reduce the amount of short-term funds they wish to
borrow.
Then the aggregate demand for short-term funds and also money market interest rates
will decline in many countries.
Document Summary
Notice how the money market rates vary substantially among some currencies. This variance is due to differences in the interaction between the country"s total supply of short-term funds available (bank deposits) and that country"s total demand for short- term funds by borrowers. When economic conditions weaken in many countries, the corporate need for liquidity declines and so corporations reduce the amount of short-term funds they wish to borrow. Then the aggregate demand for short-term funds and also money market interest rates will decline in many countries. Conversely, when economic conditions strengthen in many countries, there is an increase in corporate expansion and so corporations need additional liquidity to support their expansion. Under these conditions, the aggregate demand for funds (and also money market interest rates) will rise in many countries. Variance is due to differences in the interaction between the country"s total supply of short-term funds available (bank deposits) and that country"s total demand for short- term funds by borrowers.
