ADVERTISEMENT

Easily Understanding Money Market and Money Market Graph
E

This article gives you an overview and understanding of the Money Market and explains its importance. You can also find an explanation of the Money Market Graph in detail.

Index

  1. Introduction to Money Market and Money Market Graph.
  2. Demand and Supply of Money in the Money Market Graph.
  3. Impact of Nominal Interest Rates on the Price of Bonds.
  4. Conclusion

 

 

 

Introduction to Money Market and the Money Market Graph

To understand Money Market Graph, let us first understand what is Money Market. Money Market is an exchange market wherein the participants will have the choice to lend or borrow short term debts and loans having an average maturity of at least a year. Many institutions and even the government and banks participate in the Money Market. This increases the cash flow and income in the Money Market.

Now, a Money Market Graph is a graph that represents the relationship between the money supplied and the rate of interest. 

The ways in investing in Money Market include an individual buying a treasury bill or opening a Money Market account in a bank. There are a few important terms you need to know in the Money Market Graph.

A Money Market Graph has a supply curve, a demand curve, equilibrium price, and an equilibrium quantity. In the Money Market Graph, axis labels are present. The y-axis of the graph represents the Nominal Interest Rate. The Nominal Interest Rate means that the component in the y-axis is not just adjusted for inflation of the stocks but also the change in the price.

Money Market Graph

The x-axis represents the quantity of money. In the below graph, the demand curve is the decreasing downward slope and the supply curve is vertical which means it’s inelastic.

 

Demand and Supply of Money in the Money Market Graph

There are two things which make up the demand curve in the graph. They are the transaction demand for money and Assets demand money. In the first case, transaction demand money is defined as the total amount of money required to make the transactions smoother throughout the entire economy. The transaction demands money and the nominal GDP rates are directly proportional to each other.

In the second case, we all know that money is the most liquid asset. But just holding the money won’t get you any profit as you can’t build up interest. But, by keeping or storing the assets in the form of CD, money market or even in a savings account where the interest rate is high can save your money and increase the profit. If the asset has a lower rate of interest, the money in hand would be more and if the asset has a higher rate of interest, then the money in hand would be less. This inverse relationship in the asset and nominal interest rate causes a downward slope of the demand curve. The graphical representation of the demand curve is given below.

Money Market Graph

The supply or the money supply is completely independent of the interest rate and hence, we can say that it is perfectly inelastic. The Federal Reserve controls the inflow of the money supply. The Federal Reserve (1) uses the Monetary Policy to change the supply rates and this has an impact on the Equilibrium Nominal Interest Rate. Usually, the banks are also charged a certain amount of interest rate, known as Discount rate, when they borrow money from the feds. The bank won’t loan out a certain amount of checkable deposits known as Reserve requirement. Increasing the reserve requirement of the bank will decrease the inflow of money and decreasing the reserve requirement will result in the increase of the cash flow to the bank by the consumers.

Open Market Operations is the process of buying and selling the bonds or securities from or to the Federal Reserves. So, we can say that buying securities or bonds increases the monetary profits and selling bonds decreases the monetary profits. The actions taken by the Federal Reserve will have a huge impact on the nominal interest rate. This will change the gross investment rate and hence, this will have an effect on the Money Market Graph, instilling changes in the economy. This resembles a cycle where the change in one element disrupts the entire cycle. The actions of the Federal Reserve are closely tied with the balance sheets of every bank. The graph given below shows the supply rate.

Money Market Graph

 

Impact of Nominal Interest Rates on the Price of Bonds

The nominal interest rates represented in the Money Market Graph and even the interest rates of loans given out by the banks have an impact on the price of bonds. The increase of the interest rates results in a decrease of the bond prices and vice versa. By this observation, we can say that they are inversely proportional. For example, if a bond is bought for $2000, it gives an interest rate of 5 percent. If over the years, the interest rate drops to 2.5 percent, the bond price would shoot up to $4000. This is the influence of nominal interest rates on the price of bonds.

 

Conclusion

The Money Market plays a very important role in international trades. It provides huge funds to the government through the profit acquired in interests. Not only the government, but it also provides funds for private institutions and even to the public who have a Money Market account. Through the Money Market Graph, the interest rates and supply rates can be calculated. This will increase the liquidity and security of financial assets.

+ posts

Pratap is an avid reader and he wishes to give back the community something in return. He is currently pursuing Engineering in the field of Computer Science in Bengaluru. He has a genuine passion for writing and spreading it to everyone. He has a thirst for knowledge and always seeking it out and aiming to be a better version of himself.

Disclaimer: The views, thoughts, and opinions expressed in the article have been curated for our audience and does not warrant a 100% accuracy. All the information mentioned in the article is subject to change according to the changing viewpoints. Feel free to reach us at [email protected] for any change or copyright issues.

Note: If you buy something via a link on this page, we might earn a small commission on it.

Pratap Simha
Pratap Simha
Pratap is an avid reader and he wishes to give back the community something in return. He is currently pursuing Engineering in the field of Computer Science in Bengaluru. He has a genuine passion for writing and spreading it to everyone. He has a thirst for knowledge and always seeking it out and aiming to be a better version of himself.

Leave A Reply

Please enter your comment!
Please enter your name here

related stories

The operation of platforms such as Robinhood has left several inexperienced traders navigating the complexities of the market without adequate protection.

Robinhood, Democratizing Finance, and Novice Traders

0
The growing wealth gap and income inequality concerns have increased interest in financial service tools and strategies that expand market access to non-conventional participants,...

Health Tech Revolution, Diabetes Apps Market, and Emerging Trends

0
T1D, Type 1 diabetes is on the rise, particularly among young people. According to International Diabetes Federation 2019 data, over 1.1 million adolescents and children...
Today, let's talk about some of the fastest-growing companies in India and explore how businesses and entrepreneurs can capitalize on emerging trends.

Insights from India’s Fastest Growing Companies 2021

0
With a GDP of about 2.9 trillion USD and a population of over 1.3 billion, India is one of the most significant economies worldwide...
Today, let's discuss lucrative business opportunities in digiceuticals, print media, and the expansion of seller marketplaces.

Rising Trends: Wearable Birth Control, Print Media, and 3rd-Party Marketplaces

0
Wearable Birth Control The growing popularity of wearable healthcare products, including birth control, is an emerging transformation towards telehealth. Wearables are wireless communication devices that...
The age of information has somehow left us less informed than ever before. It has built the perfect environment for conspiracy theories.

From Influencers to Big Tech: How Everyone is Monetising From Conspiracies

0
Earth is flat, Tupac is still alive, climate change is a lie, the reptilian elite rules our world, and the COVID-19 is a biological...
Facebook would strive to be maximalist, interconnected experiences set straight out of sci-fi, a world known as the metaverse.

Mark, Metaverse, and Facebook’s Ambitious Mission

0
Mark Zuckerberg, the CEO of Facebook, told his employees about the company's ambitious new initiative last month (1). He stated that the firm is...
ByteDance's new trademark application suggests that TikTok, the short video platform that India banned over a year ago, could find its way back.

Can Tiktok find its way back to India with a changed name?

0
A year after its ban in India, TikTok, the popular short video app, is looking to re-enter its second-biggest market, according to a new...

Netflix Flirting with Gaming Industry: Smart or Dumb?

0
With over 200 million subscribers and intense competition from Disney, Amazon, HBO Max, and the likes, the biggest question of the year was, can...
ADVERTISEMENT