If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank.
Question: if households are holding more money doesn't this mean that they aren't putting in the bank i.e. interest rates are low?作者: sgupta0827 时间: 2011-7-13 17:10
I think thats what you the para means .. interest rate comes down, right?作者: mnieman 时间: 2011-7-13 17:10
I think if demand for money is high then it pushes interests rates higher as per the money market graph.. Think of money demand as consumers holding onto physical cash, not putting it in the bank..
