Money Supply

Interest
       rate

Quantity of money

Money Demand

Equilibrium in the Money Market

    Slide the shifter to see how the changes
in the money supply will affect the interest
rate (or more precisely, the short-term 
nominal rate of interest) and the quantity of 
money in the market.
    In short, when the Fed increases the money 
supply, the short-term interest rate must fall
until it reaches a level at which households
and firms are willing to hold the additional
money. When the Fed decreases the money
supply, the short-term interest rate must rise
until it reaches a level at which households
and firms are willing to hold the smaller
amount of money.

    (The money supply curve is a vertical line 
because we assume that the Federal Reserve
is able to completely control the money supply
and changes in the interest rate have no effect
on the quantity of money supplied.)

i

M

Money Supply

a = 4 (slider from 4 to 6, step 0.01)
u = Vector((0, 0), (10, 0))
v = Vector((0, 0), (0, 10))
M_1: (a, 0)
M_2: (a, 9)
f(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 9]
p = Segment(M_2, M_1)
A = Intersect(f, p, (4, 5.8))
Y_A: (0, y(A))
b = Segment(Y_A, A)