3.5.3 (HL)—Money market equilibrium

Money-market equilibrium occurs where money demand equals money supply at an interest rate.

Income, prices, payment habits and liquidity preference shift demand; central-bank supply conditions affect the rate.

Locate the shift and predict rate/quantity effects.

Higher income raises transaction demand for money and can increase the equilibrium rate if supply is fixed.

The money-market rate is not automatically the policy rate.

On a money-market diagram, label the vertical axis interest rate and the horizontal axis quantity of money. Money demand slopes downward because a higher rate raises the opportunity cost of holding liquid balances; money supply is commonly drawn vertical at the central-bank-influenced quantity. Their intersection sets equilibrium. A rightward money-supply shift lowers the equilibrium rate; a rightward money-demand shift raises it if supply is fixed. Do not shift both curves without a stated cause.