Quick Summary

To access MoneyMarket.xls, visit

MoneyMarket.xls provides a quick explanation of the equilibrium interest rate (r) that is produced by money demand and supply. It also uses the Baumol–Tobin Model to explain why money demand is a function of the interest rate and income.

Screencasts

1. • http://vimeo.com/econexcel/mmintro: introduces the money market and uses Excel's Solver to find the equilibrium interest rate

2. • http://vimeo.com/econexcel/mmcs: does comparative statics in the money market by exploring the effect on the equilibrium interest rate when changing the money supply

3. • http://vimeo.com/econexcel/mmmoneydemand: uses a Baumol–Tobin Model to derive money demand from a comparative statics analysis (using the Scenario Comp Statics add-in)

Introduction

This workbook is a stepping-stone on the way to the ISLM Model. Instead of an exogenously given interest rate, money demand and money supply (real balances) determine the equilibrium interest rate, which is then fed into the investment demand function to determine the level of investment. To help students understand money demand, a Baumol–Tobin Model is implemented. The explicit display of a money management optimization problem is an excellent way to imprint the concept of money demand.

Common Problems for Students

Money is undoubtedly one of the most confusing variables in economics. In the Keynesian Model, it is easily tangled with government spending. After all, both are in units of currency and used as policy tools. For the same reasons, students mix up money with income and wealth. Distinctions between stocks and flows are too subtle to be noticed. It may be worthwhile to review or assign the Money.xls workbook to remind students of basic monetary concepts.

Beyond these fundamental definitional problems and the need to highlight getting the variables exactly right, there is the issue of the money market itself (by which is meant a chart with demand for and supply of money, not a real-world financial market for short-term securities).