ECON 2020U Study Guide - Final Guide: Federal Funds Rate, Price Level, United States Treasury Security
Document Summary
Interest rates and the opportunity cost of holding money. Short-term interest rates: the interest rates on financial assets that mature within six months or less. Long-term interest rates: interest rates on financial assets that mature a number of years in the future. The higher the interest rate, the higher the opportunity cost of holding money. The lower the interest rate, the lower the opportunity cost of holding money. The money demand curve shows the relationship between the quantity of money demanded and the interest rate. At higher interest rates, the cost of holding money is greater, so less quantity is demanded. At lower interest rates, the cost of holding money is smaller, so a higher quantity is demanded. The following factors shift the money demand curve: Changes in aggregate price level: higher prices mean we need more money for transactions (and vice versa).
