# Reactions of the Money Market

Here's the image of a money market with two different money supply and demand curves:

Here are some questions regarding money market reactions. I'll always write my proposed reasoning underneath each questions, with a summed up answer at the end of the paragraph, and I need you to check if it's correct.

1) There's a GDP increase and no monetary policy was implemented. Is a movement from point $A$ to $C$ or $D$ to $B$ a logical reaction?

The LM curve formula is $L(Y,i) = Money Demand/Price Level$ If the government has set the money supply to $M_B^S$ and we're in point $A$, then the reaction $A$ to $C$ is correct, because we're shifting the $M_B^D$ curve because of an increase in money demand ($Y$ has a positive influence on the $LM$-equation). Same applies to point $D$, except there we have a higher money supply, so we're moving to point $B$. Answer: Yes.

2) Are the opportunity costs of money saving higher in point $B$ or $D$?

There's a higher nominal interest rate in point $B$, so saving money in $B$ is more profitable than in $D$, thus the decision not to save money in $B$ is associated with higher opportunity costs. Answer: Point $B$.

3) Is the money demand in Point $B$ higher than in $C$, because of the transaction motive?

Both points lie on the curve $M_A^D$, and any point on that curve has the same amount of money demand, only the nominal interest rate and the money supply are different. Answer: Point $B$ and $C$ have the same money demand. Answer: no.

4) Can an increase of money supply be interpreted as a movement from point $A$ to $C$?

The movement from $A$ to $C$ implies a shift/increase of money demand not money supply. The correct movement is from $A$ to $D$. Answer: No, A to D is correct.

5) We're in Point $A$ and the households suddenly want to keep less money in their savings accounts. Can this be construed as a shift of the $M_B^D$ curve to the right?

Consumers now have a higher demand for liquid money, because they don't want to save it but spend it instead. The money demand curve must shift to the right. This leads us from point $A$ to $C$. Answer: Yes, the demand for liquid money is increased.

6) We're in point $D$ and the nominal interest rate starts to increase. What's the money market's reaction?

I'm not sure about this one... the nominal interest rate has a negative effect on the LM curve, thus a higher nominal interest rate will lead to decreased money demand (or a higher price level). But wouldn't that imply a demand curve shift to the left? From the diagram, it's an impossible reaction, as the increase of nominal interest rate is associated with a lower money supply or an increase in demand, no?

All correct up to 6), although you may want to be careful with "$D$ to $A$ is correct" kind of answer, "$D$ to $A$ is consistent" seems a better phrasing - one has no idea how hard it comes out to quantify those shifts, because they impact each other.