1. The equilibrium of the classical money market r

r2LM

r0

r1

0L0, M0L, M

The above figure reveals the equilibrium mechanism of the classical money market, in which market interest rates play a decisive role in the equilibrium process. When the interest rate level is low, as shown in r1 in the above figure, the amount of money demand in the market greatly exceeds the amount of money supply, thus causing the interest rate level to rise; when the interest rate level is high, as in r2 in the above figure, the money supply in the market The quantity greatly exceeds the quantity of money demand, thus causing the interest rate level to fall. Only an appropriate interest rate level, such as r0 in the figure above, can ensure the balance of currency supply and demand in the market. This interest rate level is the so-called equilibrium interest rate. At the equilibrium interest rate level, money demand and money supply also remain in equilibrium. Therefore, in classical monetary theory, oversupply or undersupply in the money market are temporary, and the adjustment effect of interest rates will eventually balance money supply and demand. In this process, interest rates play the same role as prices in commodity markets. In fact, the interest rate is the price of using monetary funds.

2. Equilibrium of modern money market

r

r0

r1L=kY-hr

0M0M1M2L ,M

The above figure illustrates that the balance of money supply and demand in the modern money market is completely controlled by the government. The government can determine the amount of money supply according to its own purposes, and regulate market interest rates based on the amount of money supply. In the figure above, when the money supply expands from M0 to M1, the interest rate level decreases from r0 to r1; conversely, if the money supply decreases from M1 to M0, the interest rate level increases from r1 to r0.

However, it should be noted that in the horizontal stage of the money demand curve, the above-mentioned mechanism of government money supply will lose its effect. As shown in the figure, when the government's money supply continues to expand from M1 to M2, the interest rate level will remain at the level of r0 and will not decrease. At this time, currency demand is in a "liquidity trap" state. They analyzed in the first section of this chapter that because the interest rate level is too low, speculative money demand is in a state of unlimited expansion, and all the additional currency issued by the government will be absorbed by the "liquidity trap", thus preventing market interest rates. levels further reduced.