AP Macroeconomics: Money Market Quiz

The MONEY MARKET is a financial market that trades U.S. Treasury bills, commercial paper and other short-term financial instruments. This market is often used by businesses when they need short-term funds to bridge the gap between paying operating costs and collecting revenue from product sales. As such, the term "money" in money market indicates that businesses are using highly liquid instruments to raise the money need for operating expenses. The Fisher Effect is the empirically observed relationship between the expected rate of inflation and the nominal interest rate. That is, as the inflation rate rises so does the nominal interest rate. The effect is often mathematically shown as: i = r + π^e. By subtracting π^e from both sides of the equation, you have the familiar I - π^e = r.