Money Market

I.            Inverse relationship between nominal interest rate and the quantity (of money) demanded.

II.            Money demand shift determinants (MD):

            a.            Δ PL

            b.            Δ Income

             c.            Δ Taxation

III.            Money Supply is vertical

IV.            If the FED increases the money supply, a temporary surplus of money will occur at 5% interest. The surplus will cause the interest rate to fall to 2%.

V.            Increase in money supply -> Decreases interest rate -> Increases investment -> Increases AD