Money & Finance · intro
What moves on the Money Market diagram
An open market purchase increases the money supply, shifting the vertical supply line right and lowering the equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. interest rate along the money demand curve.
The vertical line is the money supply: set by the central bank, not by the interest rate.
The central bank buys government bonds from banks, crediting their accounts with new reserves.
The money supply line shifts right.
Sliding down the money demand curve, the equilibriumequilibriumThe point where opposing forces balance, quantity supplied equals quantity demanded, so there's no pressure for price to change. interest rate falls. This is the standard tool behind a rate cut.
Examiners ask this as: open market operations, buys bonds, money supply rises, easing, expansionary monetary policy.
Other scenarios on Money Market