Money MarketEdit

Money Market

The market for money: If quantity is held constant the increase in the interest rate must reflect an increase in the demand for money (holding all other things constant)

Money Supply

Change in money supply: This increase in money should have the effect of lowering the interest rate (holding all other things constant)

Money demand is downward sloping because there is an opportunity cost of holding money (that rate at which interest on money is paid). At high interest rates people are expected to carry less money, make more trips to the bank, than they would if the interest rate was very low. The money supply (in a fiat regime) is considered vertical because the quantity is set by the monetary authority (it should be noted that the money demand is only the demand for the legal tender or something like M1).


  • On the vertical axis: (i) interest rate (a type of price)
  • Horizontal axis: (Q) quantity of money demanded

See AlsoEdit

Keynesian Cross

30 year fixed mortgage rates