Money and Interest Rates San Diego State University货币和利率圣地亚哥州立大学.pptVIP

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Money and Interest Rates San Diego State University货币和利率圣地亚哥州立大学.ppt

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Money and Interest Rates San Diego State University货币和利率圣地亚哥州立大学

Money and Interest Rates Choosing between consumption and savings The Market Interest Rate What determines the equilibrium interest rate in financial markets? A financial market is any market in which borrowers and lenders interact The supply of funds being forwarded by lenders and the demand for funds by borrowers determines both the quantity of lending/borrowing and the interest rate at which these loans are made. One way to analyze this market would be to directly examine the supply and demand for bonds (loans). An alternative method would be to examine the supply and demand for money The Liquidity Preference Framework There are essentially two things you can do with your wealth: Spend it using money Save it by purchasing bonds Breaking down wealth into these two broad asset categories yields the following identity: BS + MS = BD + MD Equilibrium in the bond market will be achieved when BS = BD. The interest rate will adjust until the quantity of bonds supplied is equal to the quantity of bonds demanded. At the equilibrium interest rate, BS = BD Rearranging the identity above: BS – BD = MD – MS At equilibrium, BS – BD = 0, so… MS = MD When the bond market is in equilibrium, the supply of money is equal to the demand for money We can find the equilibrium interest rate by looking only at the money market! The Demand for Money and Interest Rates We assume that if you hold your wealth as money, you earn no interest, while you do earn interest if you hold your wealth as bonds. How does your demand for money change when the interest rate rises? The opportunity cost of each dollar held as money is the foregone interest that could have been earned had you held that dollar in bonds As the interest rate rises, so too does the opportunity cost of money The quantity of money demanded is inversely related to the interest rate on bonds. The Supply of Money and Interest Rates The current monetary system in just about every country has a single central bank respon