Money Market and Interest Rates (HL only)
Demand Management (Monetary Policy)
AO2·AO4·Diagram required·HL
Syllabus requirement
Explains how the supply and demand for money determines interest rates in the money market.
Assessment objectives
AO2 Application and AnalysisAO4 Use of Appropriate Skills
Required diagram: Money market diagram showing the equilibrium interest rate where the demand for money intersects the supply of money.
Higher LevelThis topic is assessed at HL.
Summary
The money market model shows how the demand for money and the supply of money determine the equilibrium interest rate, which is the opportunity cost of holding money instead of interest-bearing assets. It explains why the money demand curve slopes downwards and why a fixed (vertical) money supply set by the central bank implies that changes in the money supply shift the equilibrium interest rate. This model links central bank actions and monetary policy tools to market interest rates and is used in monetary policy analysis.
