What it illustrates
The money market represents the how the nominal interest rate adjusts to make the amount of money that people want to hold equal to the money supply.
Key features of the money market
-Two axes: a vertical axis labeled “Nominal interest rate” or “n.i.r.” and a horizontal axis labeled “Quantity of Money” or
- A downward sloping money demand curve labeled
and a vertical money supply curve labeled .
- An equilibrium interest rate.
Helpful hints for the money market
- The money market is a variation of the market graph.
- Be cautious with labels use only standard abbreviations if you decide to use abbreviate: “n.i.r.” for nominal interest rate, “
” for the money supply curve, “D_m” for the money demand curve, and “ ” for the quantity of money. - Always label equilibrium interest on the vertical axis, NOT in the interior.
- Use arrows to indicate the direction of a change and numbers to indicate the order of the change. For example, the graph below indicates that the money supply increased from
to , which caused the nominal interest rate to decrease from to :
Try it yourself
Here is a question from the 2017 AP Macroeconomics Exam that uses the money market. Try to solve it on your own, and then click on the solution to compare your work to the correct answer.
Explanation: First, start with a correctly labeled graph of the money market. “Correctly labeled” in a money market means you have:
- nominal interest rate on the vertical axis
- quantity of money on the horizontal axis
- a downward sloping demand for money (
) - a vertical supply curve of money (
) - an initial equilibrium interest rate (
).
Next, show the impact of the event described. If people want to hold less money, the demand for money will decrease. Therefore, we show a new demand curve showing a decrease in the demand for money (
Attribution of question: https://apcentral.collegeboard.org/pdf/ap-macroeconomics-frq-2017.pdf?course=ap-macroeconomics
Attribution of solution:https://secure-media.collegeboard.org/ap/pdf/ap17-sg-macroeconomics.pdf