Money market: Interest rate determination
Channel: Department of Economics
Date: 2012-02-22

This clip summarizes a standard textbook LM-model. "LM" stands for liquidity & money; the model is based on Hicks's interpretation of Keynes's General Theory. The financial market features two assets (money and bonds). Real money supply is determined by the central bank, real money demand is determined as a function of real income and the interest rate. The interest rate clears the financial market--money and bond markets are in equilibrium at the equilibrium interest rate.