If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Course: AP®︎/College Macroeconomics>Unit 8

Lesson 2: Every graph used in AP Macroeconomics

The money market model

Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the money market model, including:
1. what it’s used to illustrate
2. key elements of the model
3. some examples of questions that can be answered using that model.

What it illustrates

The money market represents the how the nominal interest rate adjusts to make the amount of money that people want to hold equal to the money supply.

Key features of the money market

-Two axes: a vertical axis labeled “Nominal interest rate” or “n.i.r.” and a horizontal axis labeled “Quantity of Money” or ${Q}_{M}$.
• A downward sloping money demand curve labeled ${D}_{m}$ and a vertical money supply curve labeled ${S}_{m}$.
• An equilibrium interest rate.

Helpful hints for the money market

• The money market is a variation of the market graph.
• Be cautious with labels use only standard abbreviations if you decide to use abbreviate: “n.i.r.” for nominal interest rate, “${S}_{M}$” for the money supply curve, “D_m” for the money demand curve, and “${Q}_{M}$” for the quantity of money.
• Always label equilibrium interest on the vertical axis, NOT in the interior.
• Use arrows to indicate the direction of a change and numbers to indicate the order of the change. For example, the graph below indicates that the money supply increased from ${S}_{M1}$ to ${S}_{M2}$, which caused the nominal interest rate to decrease from ${i}_{1}$ to ${i}_{2}$:

Try it yourself

Here is a question from the 2017 AP Macroeconomics Exam that uses the money market. Try to solve it on your own, and then click on the solution to compare your work to the correct answer.

Want to join the conversation?

• what is the difference between the money market and the loanable funds market? Why does one use the nominal interest rate while the other uses real interest rate?