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?

Money market is more about the money supply in the economy (so the supply is a straight vertical line, because it doesnt change based on the nominal interest rate). The market for loan-able funds i not about the money supply, so they use the real interest rate instead of nominal interest. think of that graph like any other market good supply and demand graph, because the real interest rate does change the supply of money loaned. (you get paid a higher interest rate then more people will want to supply money) hope this helps

explain why a decrease in demand of money Asa result of income would lead to fall in interest rate

If people demand less money, the money demand curve will shift left. Therefore, the new equilibrium interest rate will be lower.

Main content

Course: AP®︎/College Macroeconomics > Unit 8

Lesson 2: Every graph used in AP Macroeconomics

The money market model

Google Classroom

Understanding and creating graphs are critical skills in macroeconomics. In this article, you’ll get a quick review of the money market model, including:

what it’s used to illustrate
key elements of the model
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 $S_{M 1}$ ‍ to $S_{M 2}$ ‍, 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.

Explanation: First, start with a correctly labeled graph of the money market. “Correctly labeled” in a money market means you have:

nominal interest rate on the vertical axis
quantity of money on the horizontal axis
a downward sloping demand for money ( $M D_{1}$ ‍)
a vertical supply curve of money ( $M S$ ‍)
an initial equilibrium interest rate ( $r_{1}$ ‍).

Next, show the impact of the event described. If people want to hold less money, the demand for money will decrease. Therefore, we show a new demand curve showing a decrease in the demand for money (

M D_{2}

). As a result of the decreased demand, the nominal interest rate decreases (

r_{2}

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Em
Posted 5 years ago. Direct link to Em's post “what is the difference be...”
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?
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- hcps-palmierla
  Posted 5 years ago. Direct link to hcps-palmierla's post “Money market is more abou...”
  Money market is more about the money supply in the economy (so the supply is a straight vertical line, because it doesnt change based on the nominal interest rate).
  
  The market for loan-able funds i not about the money supply, so they use the real interest rate instead of nominal interest. think of that graph like any other market good supply and demand graph, because the real interest rate does change the supply of money loaned. (you get paid a higher interest rate then more people will want to supply money)
  hope this helps
  Comment on hcps-palmierla's post “Money market is more abou...”
  (11 votes)
patrickgyamfi2027
Posted 2 years ago. Direct link to patrickgyamfi2027's post “explain why a decrease in...”
explain why a decrease in demand of money Asa result of income would lead to fall in interest rate
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- Ava Coccaro
  Posted a year ago. Direct link to Ava Coccaro's post “If people demand less mon...”
  If people demand less money, the money demand curve will shift left. Therefore, the new equilibrium interest rate will be lower.
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smccoy23
Posted 2 years ago. Direct link to smccoy23's post “What if the people want t...”
What if the people want to hold more money, not less?
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shivani.sharma235673
Posted 2 years ago. Direct link to shivani.sharma235673's post “The equilibrium interest ...”
The equilibrium interest rate and real GDP is determined by the synthesis of product and money market
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