Money Markets draws the three interest rate graphs of AP Macroeconomics. The money market has a vertical money supply curve, MS, set by the central bank, and a downward-sloping money demand curve, MD, meeting at the nominal interest rate. The loanable funds market has an upward-sloping supply of loanable funds and a downward-sloping demand, meeting at the real interest rate, for crowding out. The market for reserves has a vertical supply of reserves and a demand for reserves that is flat at the discount rate, slopes down, then flattens at the interest on reserves, with ample or limited reserves, so the Fed can change its administered rates or buy and sell bonds. Shift either curve, or both, and the old and new interest rates and quantities are written at the axes.
Teachers use it for monetary policy questions on tests, worksheets and slides. Start from a common setup like an open-market purchase, deficit spending or lower administered rates, and the shift arrows, the dashed lines to the axes and the subscripted labels, like MS₁ and MS₂ or i₁ and i₂, are drawn the way AP graphs draw them, schematic with no numbers on the axes. Leave any label as a blank line for students to fill in, rename it, or print in black and white.
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How do you show an open-market purchase on a money market graph?
When the Fed buys bonds it pays with new reserves, banks lend more, and the money supply increases: MS shifts right from MS₁ to MS₂, the nominal interest rate falls from i₁ to i₂, and the quantity of money rises from Q₁ to Q₂. Selling bonds does the opposite. Choose Money market: open-market purchase under Common setups, or under Shift set What shifts to Supply and Money supply to Increases or Decreases, and How far to Small, Medium or Large.
Why is the money supply curve vertical?
The central bank sets the quantity of money whatever the interest rate, so the money supply doesn’t depend on it and is drawn as a vertical line. Money demand slopes down because the nominal interest rate is the opportunity cost of holding money instead of bonds: the higher the rate, the less money people want to hold. Because MS is upright, the generator draws a dashed line across to the interest rate only; the money supply curve itself runs down to the quantity.
What happens to the interest rate when money demand increases?
When nominal GDP rises, from a higher price level or more real output, people need more money for transactions, and MD shifts right. With the money supply fixed, the nominal interest rate rises from i₁ to i₂ and the quantity of money stays the same. Choose Money market: higher money demand under Common setups, or set What shifts to Demand and Money demand to Increases; the quantity is written once, as Q₁, since it doesn’t move.
How do you show crowding out on a loanable funds graph?
When the government runs a deficit, it borrows, which increases the demand for loanable funds: DLF shifts right, the real interest rate rises from r₁ to r₂, and the higher rate crowds out private investment. Some teachers show the same thing as a decrease in the supply of loanable funds, since public saving falls; either way the real interest rate rises. Choose Loanable funds: deficit spending (crowding out) under Common setups, or set Graph to Loanable funds, then under Shift either Demand for loanable funds to Increases or Supply of loanable funds to Decreases.
What is the difference between ample and limited reserves?
The demand for reserves is flat at the top, at the discount rate, slopes down, then is flat at the bottom, at the interest the Fed pays on reserves. With ample reserves, as the Fed runs policy now, the supply of reserves crosses that flat bottom, so buying or selling bonds doesn’t change the policy rate (the federal funds rate); the Fed moves it by changing its administered rates, which shifts demand down or up. With limited reserves, supply crosses the sloping part, so an open-market purchase shifts supply right and lowers the policy rate. Choose Market for reserves under Graph, then Ample reserves or Limited reserves.
How do I make a money market worksheet with blank labels?
Under Labels, choose Blank lines for Every label, and each curve, interest rate and quantity gets a line for students to write on, while the shift arrows still show which way the curve moved. The Students label a shift (blank labels) setup does this for an increase in the money supply. Set the axis titles to blank lines under Titles too, and choose Black and white under Look for a clean photocopy.
Can I label the equilibrium i* and Q* instead of iₑ and Qₑ?
Yes. Under Labels, choose iₑ and Qₑ or i* and Q* for Equilibrium values; on the loanable funds graph they are rₑ or r*, and on the reserves graph PRₑ or PR*. After a shift, the values are numbered instead, like i₁ and i₂. Tick A dot where the curves cross to mark the equilibrium, labeled E, or E₁ and E₂ after a shift, and untick the dashed lines to leave the axes bare.
Econ Figures Money Markets