Monetary Equilibrium

Monetary equilibrium occurs when demand for money and no supply of money become equal so that there is neither excess demand nor excess supply of money. Just as in the commodity market, demand and supply are brought into equality by variations in the price level, in the money market this equilibrium is brought about by the changes in the interest rate, which is nothing but the price of money. In many countries, the rate of interest is fixed by the government. In such cases, money supply adjusts to become equal to the money demand.

M_D = M_S