AP Macroeconomics / Unit 4: Financial Sector
4.5 The Money Market
Notes
Money demand slopes down (interest rate is the opportunity cost of holding money). Money supply is vertical (set by the central bank).
- Higher money supply → lower nominal interest rate.
Practice
The Fed increases the money supply. The nominal interest rate:
Shift MS right.
Money demand slopes down because higher interest rates:
You'd rather hold bonds.
Higher real GDP shifts money demand:
More transactions.
Ready for more? Take the Unit 4 test.