Draw the graph · Macro · Money market
The discount rate is raised
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Money demand stays put. Money supply shifts left.
When borrowing reserves from the central bank costs more, banks borrow less and lend less. Fewer loans mean fewer deposits, so the quantity of money falls at every interest rate. The money supply line shifts left. Money demand is unchanged.
The nominal interest rate rises.
Common mistake. Students sometimes treat the discount rate as the interest rate on the vertical axis and simply draw a higher point. The discount rate is a tool. Its effect on the diagram is a leftward shift of money supply.
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Lesson: Central Bank Tools