Draw the money market showing an increase in the money supply.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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We cannot draw graphs here, so I will describe the graph that you are asking about.

On the vertical axis of the money market graph, you have the value of money, or the nominal interest rate.  On the horizontal axis, you have the quantity of money.   The supply of money is represented by a vertical line.  You can place it wherever you want on the graph as long as there is room on the right to draw another vertical line later.  The demand for money is represented by a line that slopes downward from left to right.  Since this is a demand curve, the quantity is low when the price (interest rate) is high.

In order to depict an increase in the money supply, simply draw another vertical line to the right of your original money supply curve.  You should probably label the first money supply curve MS and the second curve MS1. 

By drawing these curves, you can see the impact of an increase in the money supply.  All other things being equal, the price of money will drop and the quantity of it that is demanded will rise.

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