Draw the graph · Macro · Money market
Incomes rise, more transactions
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 shifts right. Money supply stays put.
People hold money to make transactions. With more income and more purchases, households and firms want to hold more money at every interest rate, so money demand shifts right. The money supply is fixed by the central bank, so that vertical line stays put. The interest rate must rise to keep the quantity of money demanded equal to the fixed supply.
The nominal interest rate rises.
Common mistake. Students sometimes shift money supply right because 'there is more money in the economy.' Income rose, not the money stock. The central bank did nothing.
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Lesson: The Money Market