Economic Essay Example | Topics and Well Written Essays - 500 words

Economic - Essay Example These factors go on to achieve economic objectives, promote economic growth, and shape fiscal policies. The term ‘money’ includes paper money, coins and checking accounts. The demand and supply of such assets determine the interest rate in an economy. The equilibrium interest rate is determined by the point where real money supply equates the real money demand. The money supply is controlled by the central bank. Real money demand is influenced by the interest rate and is positively correlated with real GDP. Influencing and changing the interest rate from the equilibrium rate results in conversions from (to) interest bearing deposits to (from) money. This allows the government to influence money holdings by the public. Interest rates are also positively related to the price level in a country. Keeping all other factors constant, a rise (fall) in the real interest rates brings about a rise (fall) in the real GDP. Hence economic growth could be promoted through interest rat es and therefore economic objectives could be achieved. The money market shows the equilibrium interest rates while the foreign exchange market shows the exchange rate. Combining the two markets yields a money forex diagram.