Which graph most accurately reflects demand and supply in the money market?

• A. A graph with a vertical demand curve and a horizontal supply curve.
• B. A graph with both demand and supply curves sloping downward.
• C. A graph with both demand and supply curves sloping upward.
• D. A graph with a downward-sloping demand curve and an upward-sloping supply curve, with the equilibrium at their intersection.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the money market context, where the demand for money typically depends negatively on the interest rate (people hold less money when interest rates are high) and the supply of money is usually fixed by the central bank, making it vertical or perfectly inelastic in the short run.
2. Step 2: Recall that a downward-sloping demand curve in the money market means that as the interest rate decreases, the quantity of money demanded increases, reflecting the opportunity cost of holding money.
3. Step 3: Recognize that the supply curve of money is often vertical (perfectly inelastic) because the central bank controls the money supply independently of the interest rate, especially in the short term.
4. Step 4: Note that the equilibrium in the money market is found where the money demand curve intersects the money supply curve, determining the equilibrium interest rate and quantity of money.
5. Step 5: Conclude that the most accurate graph for the money market shows a downward-sloping demand curve and a vertical supply curve intersecting at equilibrium, rather than both curves sloping upward or downward.