I am studying for a Macroeconomics Test on the Money Market and was wondering how the Demand Curve for Money would shift when there are changes in Taxation, Income, and Price Levels? (i.e. it would move to the left / right because...)

Here is the graph and slide I am referring to:

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If anyone can help explaining this I would really appreciate it!


1 Answer 1


You can look at IS-LM models in order to understand the intuituion more deeply. In this graphic, IS curve shifts to left when there exists a demand-sided economic policy like government spendings etc. This will for sure increase the demand of people in economy, which will increase price levels. If the price level increases, with the same quantity of money circulated in economy, the interest rate will increase. (you can see it on the graph) So, a central bank must control these kind of policies with a monetary policy in order to stabilize its inflation.

The same logic in increase of income. This will increase demand, which will increase price levels and agents will need more quantity of money in order to realize their transactions.


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