So that would be your transactions motive. You see your dream iguana, then you have to wait a If you have it lent to the government and then all of a sudden One of the primary reasons you would wanna keep cash is, well, you might need to use it if you wanna go buy a candy bar, or a buy a pet iguana, that you want that money around. See in an economics class, the famous economist John Maynard Keynes came up with three particular motives for this downward-sloping curve, some of which I've already talked about. Little bit more technical, some terms that you might Why economists assume, often abbreviated as MD, so this is the demand curve for money, is downward sloping. People would wanna hold, or more likely to hold their cash. Whatever it might be.' And so at a low nominal interest rate, it makes sense that Transactions with it, 'I might want it to be around 'in case the ATM system 'I might need it, 'I might need to do some You a hundred dollars 'and a tenth of a penny.' Well then you're like, 'Gee, that doesn't make a lot of sense. Hundred dollars right now, 'in a month I will give Let's say the government says, 'Hey, you let me borrow a I might wanna lend it to the government, or to somebody else. High nominal interest rate, hey, that's a high-opportunityĬost from holding this cash. To forego holding the money, and so the quantity of Rate is quite high, then people will perhaps choose That money to the government.' Well, yes, common sense would tell you, is if the nominal interest Say something extreme, if you were to get 200ĭollars back in a month, would you want to keep a lot of money? Or would you say, 'Hey, no, I would rather lend If nominal interest rates are really high, so instead of getting 101ĭollars back after a month, if you were to get, I'll The first thing I wanna do is construct a demand curve for money. That in future videos, but we'll get to that in a second. Measure of money supply, and we're gonna think about And there is multiple ways of thinking about which And then in the horizontal axis, I am going to have the quantity of money. Nominal interest rate on this axis, right over here. Hundred dollars in my pocket, 'or I could lend it to the government 'and a month later get 101 dollars.' So we're gonna have the They can just see, 'Hey, I could either keep this People aren't constantlyĬalculating the real interest rate because they knowĮxactly what inflation is in exactly that moment. The real interest rate in this situation, and that's what people look at when they're making these decisions. On the nominal interest rate is, we don't know, in this situation, what inflation is. But we'll just write it out, the nominal interest rate in that axis.

Alright? So let's call this vertical axis the nominal interest rate. So let me draw some axes here, to start thinking about this money market. And as we are about to see, we think about the opportunity cost of holding the money as its cost in the money market.

Or, if you think about it in terms of how much money this is, you have a one-percent opportunity cost. So your opportunity cost right over here, you could view it as oneĭollar over the month. Government for that month, you are foregoing one dollar. Well, if you decide to hold this cash instead of buying this government bond, instead of lending it to the That sounds interesting, 'but I just like the feel of cash.' What is the opportunityĬost of holding the cash? Pause the video and think about that. Instead of that, if you decide, 'Hey, you know what, Government pay you back in a month for 101 dollars. So my question to you is, if you decide, instead And in one month, in one month, the government will pay back. But let's say that this isĪ federal government bond, and in one month, it costs a hundred dollars. You can also have bonds where you're lending to other entities, like states, or to corporations. Let's assume that it is risk-free, that the government is good for the money. We'll call that a bond, a bond, which is really, you're lending in this situation, you're lending this Or, you could lend that hundredĭollars to the government, and the government would pay you back, in a month, 101 dollars. You could have a hundredĭollars in cash, just like that. Very, very simple world where you had two options. Up with a cost of money? And to help us with that, I'll give you a little bit So the first question is, how do we somehow come Way to think about price, we use money as a way toįacilitate transactions. Little bit counterintuitive, because we're used to thinking about the market in other things, and we use money as a And in particular, we're gonna talk about Going to do in this video is talk a lot about money.

Money market graph