115 CFA
File: Economics - Reading 16 - 2. The Demand for and Supply of Money

2. The Demand for and Supply of Money

d. describe theories of the demand for and supply of money;

e. describe the Fisher effect;

What is the relationship between demand for money and interest rates?
It is an inverse relationship. When interest rates are high the demand for money is low. When interest rates are low the demand for money is high.

Who determines the supply of money (how much money is available in the market)?
The central bank and bank reserve requirements determine the supply of money.

What is money market equilibrium?
Money market equilibrium occurs when people are willing to hold all the money supplied by the monetary authorities at the prevailing interest rate; the supply of money equals the demand for money.

What is the Fisher Effect? What is the formula?
- The Fisher Effect describes the nominal rate of interest
- $$R_{nom} = R_{real} + R_{inflation} + risk\ premium$$

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