Draw the graph · Macro · Money market
Interest on reserves is raised
MDmoney demand
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MSmoney supply
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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 holding reserves pays more, banks lend less of them out. Fewer loans mean fewer deposits, so the quantity of money in circulation falls at every interest rate. The money supply line shifts left. Money demand is unchanged.
The nominal interest rate rises.
Common mistake. A common error is to shift money supply right because 'the central bank is paying out money.' The payment goes to banks as reserves, which they hold. Less lending shrinks the money stock.
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Lesson: Central Bank Tools
Every prompt here is one shift. The course chains them: a lesson on why the curve moves, a graded drawing, and spaced review that brings back the shifts you get wrong.