Money Market Graph: How Much Cash Does the Economy Have?

money market graphEssentially, a money market graphs allows you to compare the economy’s supply of money to the demanded money. The most liquid form of money is the demanded kind of money. It is the silver and dollar bills in your jacket pocket.  Basically cold hard cash. A money market graph lets you make an evaluation of the effects of money supply and money demand and the way they are related to the economy’s nominal interest rates. Here is a course entitled Making Sense of Your Money which will teach you financial goals and how to work out the amount you need for your goals.

Money Supply Line

In the money market graphs, the line for money demand is a negative slope while the money supply is a vertical, constant line. On the graph, you will see that the money demand and money supply are labelled MD and MS respectively. You might also notice that on the graph, that is the nominal rate of interest, not interest rates that are ‘real.’ It is of importance that you distinguish the varied rates of interest with their respective graphs, like real interest rates with the loanable funds market and nominal interest rates with the money market graphs. You use the nominal rate of rate with the Money Market Graphs since the supply of money deals with nominal value and inflation rather than real value. For abbreviation, nominal interest rate is written as ‘I’. By the way, here is a course entitled How to Save Money that gives you the steps you can take towards financial independence.

Shifts

It is fairly straightforward when changes in the supply of money occur. When there is an increase, the curve of supply makes a shift to the right. If there is a decrease in the supply of money, the curve of supply shifts to the left. While shifts in the supply of money are relatively straightforward, the money demand shifts are somewhat more involved. The money market does not have specified determinants that will cause a shift. Rather, common sense and critical thinking needs to be used to determine the effects of actions on the demand of money. Here is a course entitled Easy to Understand Money Management Basics that will have you wondering no more about what you need to have a solid financial basis.

Example of Demand Curve Shift

For example, in an economy, incomes fail, what effect will this have on the nominal interest rate of an economy? In a case like this, incomes that decrease will lead to less money being held in the form that it is liquid. People will hold less money as cash since people will bring in less money. This will cause the demand curve to shift to the right. On the demand curve, with a shift to the right, a new point of equilibrium is established at lower nominal rates of interest and the same money quantity. Thus, decreased incomes will decrease the nominal interest rate of the economy.

Money Demand

There is a negative slope for money demand on the graph. When there are low nominal rates of interest, typically, people do not save very much due to a lower savings yield. Because of this, people hold money in its cash or liquid forms and there are high demands of the quantity of money. When there are high interest rates, people do not hold as much in the form of liquid money and save the money instead. During times like this, there are low demands of the quantity of money. When the rates of nominal interest rise, there is then a decrease in the demand of the quantity of money. Between the two, this creates an indirect relationship. Here is a course you might be interested in entitled How to Raise Money for Your Business that shows you all you need to know about raising money to get your business started.

Money Supply

In an economy, the quantity of money is called the money supply. At any time in an economy, there is a constant quantity of money. In most countries, the government or the central bank (like in America, it’s the Federal Reserve) controls the economy’s money amount at any given time period. Since at any time, there is a constant supply of money, there is no relation to an economy’s nominal interest rates. This is displayed as the vertical line in the money market graph. Here is an article entitled Small Investment Ideas: How You Can Start Growing Your Money Now you might want to check out.

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