Financial Markets and the Economy
Demand, Supply, and Equilibrium in the Money Market
Equilibrium in the Market for Money
The money market is the
interaction among institutions through which money is supplied to
individuals, firms, and other institutions that demand money. Money
market equilibrium occurs at the interest rate at which the quantity of
money demanded is equal to the quantity of money supplied. Figure 10.8
"Money Market Equilibrium" combines demand and supply curves for money
to illustrate equilibrium in the market for money. With a stock of money
(M), the equilibrium interest rate is r.
Figure 10.8 Money Market Equilibrium
The
market for money is in equilibrium if the quantity of money demanded is
equal to the quantity of money supplied. Here, equilibrium occurs at
interest rate r.