Name: Equilibrium nominal interest rates in the money market | AP Macroeconomics | Khan Academy
Uploaded: 2020-03-03T23:32:01.000Z
Duration: 3 min 59 s
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- [Instructor] So we've spent a lot of time justifying

why we have this downward-sloping demand curve for money.

Adverbs of manner

But you're probably asking, well, this is a market, what,

we didn't think about an equilibrium point.

And to do that, we need to think about the supply of money.

we've started thinking about the supply of money,

we assume a perfectly inelastic supply of money.

which is another way of saying that the supply of money

is not impacted by the nominal interest rate.

Where it intersects the quantity of money,

I'll just call that M sub one right over here.

is the equilibrium point in our money market.

The equilibrium nominal interest rate right over here,

This would be the opportunity cost for holding money.

Now I have to give a little bit of a disclaimer.

and we'll talk more about it in future videos.

where the central bank might set the supply of money,

And then the nominal interest rate gets set

Central banks actually target a nominal interest rate.

well, that's going to impact the actual quantity of money.

So keep that little disclaimer in the back of your mind.

So now that we have this neat little model

let's think about what would happen in different situations.

Let's think about a situation where, for whatever reason,

people lose confidence in the electrical grid.

What would happen to the demand curve for money?

Well, if people lose trust in the electrical grid,

Regardless of what the opportunity cost is of holding money,

people would want to hold more of it because,

like, hey, you know, I don't know if I'll be able

to access money if the lights go out again.

And so at any nominal interest rate, I would

And so that would shift the demand curve for money to

I could've drawn it a little less hairy, but there you go.

if you had this demand for money increase,

to the actual equilibrium nominal interest rate?

If you look at this point right over here,

assuming that the quantity of money has not changed,

you have a new equilibrium interest rate,

in order to get people to part with that money,

The opportunity cost of holding that money has to go up.

And you could imagine the reverse scenario.

If, for some reason, people thought it's a lot less likely

that the lights are gonna go out, or they said, you know,

I don't need as much cash around for transactions

And in that situation, you would have a decrease

in the equilibrium nominal interest rate.

Always keep these models with a grain of salt.

They're simplifications of the real world, especially here,

where we're assuming a perfectly inelastic supply of money,

which actually isn't the case in the real world.

for the purposes of starting to study the money market.

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Equilibrium nominal interest rates in the money market | AP Macroeconomics | Khan Academy

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