Unit 24. The money market (рынок денег)

The money market comprises the demand for money and 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 changing 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 add 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 interest-bearing 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't 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 raises 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 notes

equities (syn. ordinary shares, equity shares, ordinary stocks) обыкновенные акции

to deplete истощать, исчерпывать

obvious очевидный

to offset возмещать

Treasury bills казначейские векселя

consequently следовательно, поэтому

conversely наоборот

temporary surplus временный избыток, излишек

Assignments

I. 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

II. Replace the parts in italics by synonyms

to offset this cost

III. Fill in the gaps with the words and expressions from the text

1. The money market comprises and .

2. The equilibrium in the money market is such when the demand for money from is satisfied by the quantity of .

3. The equilibrium in the money market is reached by .

4. Money is the medium of that .

5. We use bonds to stand for all other that are not directly .

6. As people earn income, they __ their wealth. As they spend, they

their wealth.

7. of holding money is the interest one if he (she) bonds.

8. People will hold money rather than bonds only if holding money is

than holding bonds, that is when on bonds are to make it profitable to

9. In case the interest rate goes down are no longer profitable as they

can't .

10. The demand for money will rise and will lead to in the money market.

11. If they lack money, households and businesses are likely to they

possess .

12. If there is an increase in the bond supply, it will bond prices and interest rates on .

13. The money supply will to a current demand to a new higher interest rate.

14. The increase in the money supply creates its , which results in .

IV. Find in the text English equivalents for the following

равновесие денежного рынка; временная нехватка (избыток) денег; иметь на руках; быть в равновесии; восстанавливать равновесие; достичь равновесия; активы (облигации), приносящие процентный доход; увели­чивать богатство; исчерпывать (истощать) богатство; для простоты допус­тим, что...; альтернативные издержки владения деньгами; компенсиро­вать издержки

V. Answer the questions

1. Explain in your own words the term "opportunity costs". What is the opportunity cost of holding money?

2. What's the equilibrium in the money market? How can it be reached?

3. How does the money market work?

VI. Translate into English using all the active possible

1. Для экономики плох как недостаток, так и избыток денег, так как первый ведет к снижению расходов во время упадка, а последний - к обесценению денег и снижению их покупательной способности во время инфляции.

2. Денежный рынок объединяет спрос и предложение денег для опре­деления равновесной ставки процента.

3. Равновесие денежного рынка устанавливается посредством изменения цен на облигации. С изменением цен на облигации процентные ставки ме­няются в обратном направлении. При равновесной ставке процента цены на облигации постоянны, а спрос и предложение денег равны.

4. Уменьшение предложения создает временную нехватку денег на де­нежном рынке. Люди и учреждения пытаются получить больше денег путем продажи облигаций. Поэтому предложение облигаций увеличива­ется, что понижает цену на облигации и поднимает процентную ставку.

5. Увеличение предложения денег создает временный их избыток, в результате чего увеличивается спрос на облигации и цена на них стано­вится выше. Процентная ставка падает, и на денежном рынке восстанав­ливается равновесие.