Financial Markets - Determining the Interest Rate - Money demand, money supply and the equilibrium interest rate
4 important questions on Financial Markets - Determining the Interest Rate - Money demand, money supply and the equilibrium interest rate
What is the LM relation?
(L uit LM relation is geloof ik van interest rate)
What does an equilibrium in financial markets require and what is the equilibrium condition?
- requires that money supply be equal to money demand, or that Ms = Md. Then using this equation, the equilibrium condition is:
- Equilibrium condition:
M=€YL(i)
How should the interest rate be determined?
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To what does an increase in the supply of money lead? And why?
- An increase in the supply of money leads to a decrease in the interest rate
- (Why?): ik denk omdat de vraagfunctie gelijk blijft. Aangezien nominal income (€Y) niet stijgt, zal interest rate (L(i)) moeten dalen om weer een equilibrium te krijgen. Zie afbeelding.
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