AP Macroeconomics Unit 4 Part 3
First, when making your graph you must label your axis. Starting with the y-axis which should be labeled interest rate. On the x-axis, it should be labeled quantity of money. Demand for money is downward sloping, because when price is high the quantity demanded is low and when the price is low the quantity demanded is high. The supply of money is vertical, because it does not vary based on the interest rate. The supply of money is fixed and set by the Fed.
When demand for money increases the graph is shifted to the right and when the demand for money decreases the graph shifts to the left, not up or down. When this happens, quantity does not change, because supply is vertical. If the Fed does not want to have high interest rates, they can just increase the money supply and bring it back down. A shift of the money supply to the right would stabalize interest rates.
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