Preliminary Economics Help Required (1 Viewer)

[GaDaMIt]

firstly, year 11 eco leading edge textbook states one factor of factors affecting interest rates as

demand for liquid funds : if individuals in the economy have a stronger preference for highly liquid funds, they may be willing to forego the yields (returns) from buying securities, and instead choose to hold their funds in bank deposits or in the form of currency. This would mean that the supply of loanable funds is lower and would put upward pressure on the rate of interest

correct me if im wrong, but doesnt having funds in banks = HIGHER supply of loanable funds?


and also I dont understand the textbooks definition of short term money market

"The short term money market brings together people and businesses with temporary shortages or surpluses of funds. Those with surplus funds, such as banks, issue various forms of debt securities (such as bank bills or promissory notes) to those in need of funds. These debt securities all have a maturity date of less than one year".....

so wat exactly IS the short term money market? What it does it clearly explained "The short term money market brings together people and businesses with temporary shortages or surpluses of funds" but i dont get what is actually IS?

 

[GaDaMIt]

Short-term money market
The sector of the financial market which caters for the borrowing and lending of money for short periods, usually less than six months and nearly always less than twelve months, and trading in short-dated securities. The short-term money market includes the cash market (overnight and seven-day money), trading in 90 - day and 180 - day bills of exchange, negotiable certificates of deposit, promissory notes and treasury notes, and the fixed-interest market which focuses on government and semi-government bonds. Players in the short-term money market include banks, investment and merchant banks, finance companies, stockbrokers and a range of financial institutions.

thats confused me more .. whats meant by that?

 

[gnrlies]

firstly, year 11 eco leading edge textbook states one factor of factors affecting interest rates as

demand for liquid funds : if individuals in the economy have a stronger preference for highly liquid funds, they may be willing to forego the yields (returns) from buying securities, and instead choose to hold their funds in bank deposits or in the form of currency. This would mean that the supply of loanable funds is lower and would put upward pressure on the rate of interest

correct me if im wrong, but doesnt having funds in banks = HIGHER supply of loanable funds?


and also I dont understand the textbooks definition of short term money market

"The short term money market brings together people and businesses with temporary shortages or surpluses of funds. Those with surplus funds, such as banks, issue various forms of debt securities (such as bank bills or promissory notes) to those in need of funds. These debt securities all have a maturity date of less than one year".....

so wat exactly IS the short term money market? What it does it clearly explained "The short term money market brings together people and businesses with temporary shortages or surpluses of funds" but i dont get what is actually IS?

first part...

To remove confusion, lets simplify the situation.

Assume people can only do two things with their income -

1 - Hold currency so that they can purchase goods and services
2 - Hold bonds (or securities) so that they can earn an income on their money (i.e. interest etc).

Currency is liquid as it can readily be used as a medium of exchange, howevor does not earn any income. Bonds are not liquid as they cannot be traded for goods and services, howevor they earn an income.

Individuals must make a decision as to what proportion of their income they are going to spend on currency and bonds.

This decision is going to depend on their liquidity preference, as well as their risk preference (as bonds or securities will have some risk assosciated with it).

If the individual has a higher liquidity preference, they are going to want a higher portion of income in the form of currency. Because they can only have either currency or bonds, they therefore have to reduce their consumption of bonds. (i.e. the consumption of bonds and currency must add to equal their income)

Upon them demanding less bonds, the supply of lonable funds will reduce.

....Now, in the case of the leading edge example, they've basically said the same thing except that instead of using currency, theyve used deposits. Make the assumption that deposits at the bank earn no interest and are not loaned to a second party. Leading edge is only talking in simplified terms. You can think of it in terms of currency if this clears that up.

Second part....

The short term money market is like any market.

You go to the fruit market and you find buyers and sellers of fruit.

It is the same here, except you have buyers and sellers of short term funds.

 

[goldenphoenix1]

firstly, year 11 eco leading edge textbook states one factor of factors affecting interest rates as

demand for liquid funds : if individuals in the economy have a stronger preference for highly liquid funds, they may be willing to forego the yields (returns) from buying securities, and instead choose to hold their funds in bank deposits or in the form of currency. This would mean that the supply of loanable funds is lower and would put upward pressure on the rate of interest

correct me if im wrong, but doesnt having funds in banks = HIGHER supply of loanable funds?


and also I dont understand the textbooks definition of short term money market

"The short term money market brings together people and businesses with temporary shortages or surpluses of funds. Those with surplus funds, such as banks, issue various forms of debt securities (such as bank bills or promissory notes) to those in need of funds. These debt securities all have a maturity date of less than one year".....

so wat exactly IS the short term money market? What it does it clearly explained "The short term money market brings together people and businesses with temporary shortages or surpluses of funds" but i dont get what is actually IS?

The short term market:
Short term: Like without wings said, its for short periods of times
businesses who dont have enough funds to go on, or want to expand their business, need quick funds, that they can use quickly

knowing that they can pay it off quickly they go to the short term market

businesses who have surplus funds, with money just sitting there, earning no money (god knows losing money as inflation is pushing the value of money down) want to make profits, as you do. So instead of money just sitting there they go to the short term money markets to lend.

A double edged sword for both sides:

-Borrowers:

Pros--Lend at the short term market and you can pay it back quickly with no hassles to hold repayments for long periods of time when you just need money for i bit.

Con--often higher interest rates.

-Lenders:

Pros--Higher interest rates. YAY

Cons--It's often entising for businesses to lend money out for higher interest, if its just sitting there. Business sometimes find themselves in a rutt when they lend more than they can.