Money & Finance · intermediate
What moves on the Money Market diagram
A rise in liquidity preference shifts money demand right against a fixed money supply, pushing the equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. nominalnominalMeasured in current dollars, unadjusted for inflation. interest rate up.
The downward-sloping curve is liquidity preference: how much money people want to hold at each interest rate.
A banking scare breaks out and everyone wants to be holding cash rather than illiquid assets.
Money demand shifts right at every interest rate.
With the supply of money fixed by the central bank, the interest rate is forced up. This is exactly the moment central banks step in as lender of last resort.
Examiners ask this as: liquidity preference, panic, cash hoarding, money demand rises, crisis.
Other scenarios on Money Market