Macroeconomics
3. Speculative Motive: People hold money when the returns onfnancialassets,suchasbonds,aretoolow. They would rather buy fnancial assets when their returns increase,sotheyholdmoneynowwiththeaim ofmakingfuturegainsfrombuyingfnancialassets. For instance,peopleprefertoholdmoneywhenbondprices aretoohighandexpectedtofalllater.Inthiscase,they wouldnotforgomuchinterestandwouldnotreallymake capital loss. The speculative demand for moneyislow when the price of bonds is low and the interest rate is high. G. Money Market
Just as we've examined the dynamics of demand and supply of output at both micro and macroeconomiclevels(e.g.,marketdemandandsupplyvs.aggregatedemandandsupply),moneyalso has its own market, where the interaction of its demand andsupplyestablishestheequilibriumprice and quantity.
We’ve seen in the previous section what determines money demand. What about money supply? In general, an economy’s money supply depends on the central bank ortheFedintheU.S.Itisultimatelydeterminedby the monetary base (currency in circulation and bank reserves) and the money multiplier . Since in most countries, the central bank determines the monetary base, we will consider the money supply (Ms) as fxed and independent of the interest rate . Note that this is notalwaysthecaseinreallife;however,wewillfollowthis assumption for a simple introduction of the money market.
Since money supply is fxed, its curve is a vertical line that is neither downward nor upward sloping. This means that a change in the interest rate does not affect money supply. When the Fed decides to reduce money supply in what is known as a contractionarymonetarypolicy, the Mscurveshiftstotheleft .Incontrast,whenthe Fed increasesmoneysupply inwhatisknownasan expansionary monetary policy, the Ms curve shifts to the right .
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