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Money market equilibrium

Definition

Money market equilibrium refers to the state in which the demand for money equals the supply of money, resulting in a stable interest rate. It occurs when individuals and businesses are willing to hold exactly the amount of money available in the economy.

Analogy

Imagine a seesaw with two people sitting on it. The person on one side represents the demand for money, while the person on the other side represents the supply of money. When they are balanced and at an equal level, it represents money market equilibrium, where both sides are satisfied.

Related terms

Liquidity preference: Liquidity preference refers to individuals' desire to hold liquid assets such as cash or bank deposits rather than non-liquid assets like stocks or bonds.

Nominal interest rate: The nominal interest rate is the stated interest rate without adjusting for inflation. It represents how much borrowers pay and lenders receive.

Monetary policy: Monetary policy refers to actions taken by central banks to manage and control the money supply, interest rates, and credit conditions in an economy.