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Financial Market Equilibrium

equilibrium conditions- where money supply equals money demand  

  • money supply generally given as a constant (vertical line)
    • doesn't change w/ interest rate
  • Ms = Md
  • Md / $Y = L(i)
    • Md / $Y - ratio of money demand to nominal income (fraction of total income that ppl hold as money)
  • LM relation - equilibrium at intersection of money supply and money demand (downward sloping curve dependent on interest rate i from L(i))
    • interest at level that that cause ppl to hold Md equal to Ms
    • if Md=Ms then Bd=Bs since (wealth = B+D and wealth stays constant)
  • changes in $Y >> shift of Md curve
  • changes in interest rate >> mov't along curve

 

  • money supply (not dependent on interest rate at all)
  • money demand
  • equilibrium

 

  • higher $Y >> higher interest rate
  • lower $Y >> lower interest rate
  • money demand always equals money supply at equilibrium, so interest rate adjusts
  • need higher interest rate w/ higher income to compel consumers to invest and have the same money demand as before, etc
Subject: 
Economics
Subject X2: 
Economics

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