Question 1

What does the money market graph show?

Accepted Answer

The supply and demand for money

X-Axis: Quantity of money demanded

Y-Axis: Nominal interest rate

Question 2

What is the relationship between the nominal interest rate and the quantity of money demanded?

Accepted Answer

Inverse

(as the nominal interest rate increases, the quantity of money demanded decreases, and vice-versa)

Question 3

Why is the relationship between the NIR and quantity of money demanded inverse?

Accepted Answer

As NIR increases, the opportunity cost of holding money also increases since people could profit more by depositing their money in an interest bearing account

Question 4

Why is the money supply independent of NIR?

Accepted Answer

The money supply is determined by the Federal Reserve, so it has no direct relation to NIR

(this is why it's vertical on the money market graph)

Question 5

What happens in the money market when there are disequilibrium nominal interest rates?

Accepted Answer

There are surpluses and shortages in the money market

(market forces drive nominal interest rates toward equilibrium)

4.5 The Money Market, AP Macroeconomics Flashcards