Financial markets.

If you have money, you can either hold it, or buy bonds.

Bonds cannot be used in transactions. Money does not yield interest.

What is the distribution? Depends on requirements. If interest is high, more incentive to buy bonds. If you need immediately, more liquid. That is, the factors to consider are,

• transaction level,

• interest rate

Demand for money

Higher the interest, lower the demand for money.

• $i$ is the interest rate.

• $M_d$ is money demand.

• $L$ is a function of interest rate.

• $Y_n$ is nominal income of a country.

The relationship between interest rate and money is negative.

The curve is negatively sloping.

What happens to the money demand curve if the nominal income increases. The curve shifts outward, more money is seeked.

Suppose money supply is fixed. Then the equilibrium point is the interset rate at the money supply, on the money demand curve.

If the money supply increases, the supply of money is higher than the demand. This causes interest rates fall, disinsentivising bonds. This brings in a new equilibrium.