Draw the graph · Macro · Money market
A recession cuts spending
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 left. Money supply stays put.
With less income and fewer transactions, households and firms want to hold less money at every interest rate. Money demand shifts left. The money supply is fixed by the central bank, so the vertical line stays put. The interest rate falls until people are willing to hold the existing money stock.
The nominal interest rate falls.
Common mistake. Some students shift money supply left because 'there is less money around.' The money stock did not change. People just need less of it for transactions.
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Lesson: The Money Market