's model
IB8 is a part of Fisher's model that shows how the demand for money is a function of the nominal interest rate. This part of the model shows how the demand for money varies as the nominal interest rate rises and falls, and how it is related to the level of prices in the economy. The basic theory is that as the nominal interest rate rises, the cost of holding cash balances increases, leading to a decrease in the demand for money. Conversely, as the nominal interest rate falls, the cost of holding cash balances decreases, leading to an increase in the demand for money. In addition, the relationship between the demand for money and the level of prices is known as the Fisher Effect – when prices increase, the demand for money decreases, and when prices decline, the demand for money increases. Finally, the demand for money is assumed to be perfectly elastic at the prevailing nominal interest rate, meaning that an increase in the nominal interest rate will have no effect on the demand for money.