How Supply of Money and Demand for Money Determine Rate of Interest

Money demand is determined by businesses and consumers need for money either in form of checking, cash and saving accounts, and they involve financial institutions to accomplish this purpose. Money supply on the other hand is determined by the federal reserves. Demand curve for money demonstrates how much cash will be held willingly at every interest rate.  Interest rate change moves individuals along the money curve of demand. Money demand change as a result of other factors apart from the interest rate results to the shift of the curve. Money supply curve is a line demonstrating the total money quantity in the economy at a given interest rate (Rittenberg & Tregarthen, 2015).

The money supply change results to a straightforward shift of the curve to the right when the money is increased and to the left if the money supply is decreased. Money demand on other hand is represented by a negative sloping curve. During low nominal interest rates people avoid saving due to low saving output. During this time individuals holds money in its liquid form, thus increasing the money demand in the money market. At high nominal rates, people prefer saving than holding money in liquid form, this reduces the demand of money in the market.  The money market reaches the equilibrium point when the amount of money demand is equal to the amount of money in the supply (Rittenberg & Tregarthen, 2015).

Share with your friends
Order Unique Answer Now

Add a Comment