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The Money Market and The Interest Rate Do people always want as much money as possible YES However when we talk about demand we know that there are sacrifices that have to be given up specifically every individual faces a constraint So the demand for money is how much money people would like to hold given the constraints that they face An individuals demand for money Money is one of the forms in which people hold their wealth At a given time the total amount of wealth is given If we want to hold more wealth in the form of money we must hold less wealth in other forms - savings account money market funds time deposits stocks etc An individuals quantity of money demanded is the amount of wealth that the individual chooses to hold as money rather than as other assets Why do people want to hold more money The most important reason is that money is a means of payment Other forms of wealth are not used for purchases The other forms of wealth provide a financial return to their owners Money pays either zero cash or non-interest bearing checking accounts or very little some types of checking accounts interest When you hold money you bear an opportunity cost - the interest you could have earned Assumption - individuals choose how to divide wealth between two assets 1 money which can be used as a means of payment but earns no interest and 2 bonds which earn interest but cannot be used as a means of payment What determines how much money an individual will decide to hold 1 The price level - a rise in the price level which raises the dollar cost of your purchases should increase the amount of money you want to hold 2 Real income -With a rise in income your purchasing power increases 3 Interest
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