The money market

The money market comprises the demand for money and the money lilibrium in the money supply. The equilibrium in the money market is such a state of balance when the demand for money from households and businesses is satisfied by the quantity of the money supplied. The equilibrium in the money market is reached by bond prices.

People can hold their wealth in various forms - money, bonds, equities, and property. For simplicity we assume that there are only two assets: money, the medium of exchange that pays no interest, and bonds, which we use to stand for all other interest-bearing assets that are not directly a means of payment. As people earn income, they ad to their wealth. As they spend, they deplete their wealth. How should people divide their wealth at any instant between money and bonds to gain the best profits possible and not to incur losses?

There is an obvious cost of holding money. The opportunity cost of holding money is the interest one would have gained if he (she) had held bonds. It naturally follows that people will hold money rather than bonds only if there is a benefit to offset this cost, only if holding money is more profitable than holding bonds. It may happen only when interest rates on bonds are too low to make it profitable to hold bonds.

Suppose the money market is in equilibrium when the interest rate on

assets (e.g. Treasury bills and other securities) is 6% and the amount of money demanded is $200 mln. Now suppose the interest rate goes down, say , to 4 %. In this case interest-bearing assets are no longer profitable as they can not earn a sufficient return. Hence the demand for money will rise and will lead to a temporary lack of money in the money market. If they lack money, households and businesses are likely to sell bonds they possess for cash.

That will cause an increase in the bond supply, which lowers bond prices and rises interest rates on interest-bearing assets. With a higher interest rate the amount of money people are willing to have in hand will decrease again . Consequently, the money supply will adjust to a current demand to reflect a new higher interest rate.

Conversely, the increase in the money supply creates its temporary surplus, which results in the demand for bonds and bond prices going up. The interest rate falls thus restoring balance in the money market, but at a new lower interest rate.

Vocabulary

equities ( ordinary shares, equity shares, ordinary stocks) - обыкновенные акции

to deplete -истощать, исчерпывать

obvius -очевидный

to offset -возмещать

treasury bills - казначейские векселя

consequently - следовательно, поэтому

conversely – наоборот

temporary surplus - временный избыток, излишек

1. Suggest the Russian equivalents

interest-bearing assets are no longer profitable; to sell bonds they possess for cash; the supply will adjust to the current demand; we use to stand for all other interest-bearing assets; thus restoring balance

2. Replace the parts in italics by synonyms

to offset this cost