I hate MD-MS model. It gives students bad perception of money and interest. After first year macro, many students believe interest is price of money. It is not. Interest is price of credit. Textbooks usually say it is opportunity cost of holding money. It is a right definition but not easy to grasp.
Why is interest not price of money? When I buy an apple, I pay its price. Then, the apple becomes mine. However, when I borrow money from somebody else, that money does not become mine. I will have to pay back. It is the same as rent for a house. When I rent a place, that place does not become mine. I will have to give it back to the landlord at the end of lease. Rent is the price for right to use the place, not the price for ownership.
Then, what is the price of money? It is actually 1/P. Several macro textbooks do not have this part but Mankiw's textbook explains this in detail. Money is not traded for the same amount of money. Price of money cannot be measured monetary term. Money is traded for goods and other assets. Therefore, 1/P represents what quantity of goods I must pay to buy one unit of money. Falling price of money means I pay less amount of goods for one unit of money. Thus, price and money reciprocal.
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