4.2 Money Market

• Assets in the money market are highly liquid.


  True
• What does the supply of money refer to?

  Currency and demand deposits
• Order the steps of how a lower discount rate affects the money supply:

  1️⃣ Lower discount rate encourages borrowing from central bank

  2️⃣ Increased borrowing increases reserves

  3️⃣ Banks lend more money

  4️⃣ Money supply increases
• How does an increase in interest rates affect the demand for money?

  Decreases demand
• Order the factors affecting the equilibrium in the money market:

  1️⃣ Supply of money is controlled by central bank

  2️⃣ Demand for money depends on motives

  3️⃣ Equilibrium interest rate is determined
• The supply of money in the money market is controlled by the central bank.


  True
• The supply of money is graphically represented as a vertical line because it is fixed by the central bank.
• Short-term instruments in the money market have maturities of one year or less.

  True
• Describe the process by which open market operations affect the money supply.

  1️⃣ Central bank buys government bonds

  2️⃣ Commercial banks receive excess reserves

  3️⃣ Banks lend out excess reserves

  4️⃣ Money supply increases
• Why do people hold money for the transaction motive?

  For day-to-day purchases
• What happens to the demand for money as interest rates rise?

  It decreases
• What are the three motives for holding money that influence the demand for money?

  Transactions, precautionary, speculative
• The equilibrium in the money market is determined by the intersection of the supply and demand for money
• The supply of money is controlled by the central bank through monetary policy tools
• At the equilibrium interest rate, the quantity of money demanded equals the quantity of money supplied.


  True
• What are the factors that can shift the money demand curve?

  Income, price level, economic outlook
• Buying government bonds increases the money supply
• Money market instruments have maturities of one year or less and are therefore considered short-term
• Match the money market instruments with their abbreviations:

  Treasury Bills ↔️ T-bills

  Certificates of Deposit ↔️ CDs

  Repurchase Agreements ↔️ Repos
• Lowering reserve requirements increases the money supply.


  True
• Match the motive for holding money with its explanation:

  Transactions motive ↔️ Day-to-day purchases

  Precautionary motive ↔️ Unexpected expenses

  Speculative motive ↔️ Profit from interest rate changes
• The equilibrium interest rate in the money market is determined by the intersection of the supply and demand
• The equilibrium in the money market is determined by the intersection of the supply and demand for money
• Describe the process of determining the equilibrium interest rate in the money market.

  1️⃣ The supply and demand for money intersect

  2️⃣ The intersection point determines the equilibrium interest rate
• Match the central bank action with its effect on the money supply:

  Buying government bonds ↔️ Increases money supply

  Selling government bonds ↔️ Decreases money supply

  Lowering reserve requirements ↔️ Increases lending and money supply

  Raising the discount rate ↔️ Reduces borrowing and money supply
• The money market trades short-term debt instruments with high liquidity and low risk.
• People hold money for three primary motives: transactions, precautionary, and speculative.

  True
• Match the motive for holding money with its interest rate sensitivity:

  Transactions ↔️ Low

  Precautionary ↔️ Moderate

  Speculative ↔️ High
• The central bank controls the supply of money in the money market.

  True
• The supply of money is graphically represented as a vertical line because it is fixed by the central bank.
• The equilibrium interest rate is determined where the supply and demand for money intersect.


  True
• What are the three primary motives for holding money?

  Transactions, precautionary, speculative
• Lowering reserve requirements increases lending and the money supply
• Higher income levels increase the need for transactions, shifting the money demand curve to the right.


  True
• What is the money market defined as?

  Short-term debt market
• Why are money market instruments considered low risk?

  Short maturity and issuer creditworthiness
• Open market operations (OMO) involve the central bank buying or selling government bonds
• What is the primary goal of monetary policy tools?

  Manage money supply
• The opportunity cost of holding money increases as interest rates rise.


  True
• What is the equilibrium interest rate in the money market determined by?

  Intersection of supply and demand