Supply and Demand of Money

[MT327]

If LT equilibrium of the Money market is at 4% and the current rate is at 3%.

Why would there be an excess of demand and why would bond investors tend to be net sellers vs. buyers.

As far as the bonds go, I assume that bond prices will be up, so they would be more willing to sell (even though they would have to reinvest at a lower rate).

But if rates are low, wouldn't there be more supply for the money market because people don't want to invest at the lower rate?

Schweser says there would be excess demand. Are they looking at it from the standpoint of the rates are lower because there was excess demand that pushed the rates lower? Or am I missing something?



Edited 1 time(s). Last edit at Thursday, June 5, 2008 at 09:35PM by MT327.

 

[TheChad]

The way I understand it is that equilibrium Q is the amount of money people want to hold at a specific interest rate. If the interest rate is less than the equilibrium, then people have too much money invested in bonds (which are worth more at the lower interest rate), so they start to sell them which decreases their value, which, in turn, increases interest rates. This continues until enough bonds have been sold to where equilibrium is achieved again (at the higher interest rate)