Money Market
(Supply and Demand for money)
Demand for money has an inverse relationship between nominal interest rates and the quantity of money demanded.
Money Demand Shifter
- Changes in price level
- Changed in income
- Changes in taxation that affects investment
Increasing the Money Supply
Increase money supply > decrease interest rate > increase investment > increase AD
How do banks create/make money
Demand deposits are created through the Fractional reserve system.
- It is the process in which banks hold a small portion of their deposits in reserve, and they loan out the excess
- Banks keep cash on hand (required reserves) to meet depositors needs
- Banks must keep reserve deposits in their volts or at their district FED
- Total reserve (total funds held by a bank) =
Required reserves + excess reserves
- Banks can only lend out their excess reserves
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