Loanable Funds Market Money Market Interest rate Interest rate Ms Supply XX Md Demand QLF Q$$ QLF The graphs above represent the Money Market and the Loanable Funds Market. The Money Market graph is used to show how short- term interest rates are determined. The Loanable Funds Market graph is used to show how long-term interest rates are determined. a. In the Money Market, who/what determines the amount of money in circulation (Ms)? What VERY strong assumption are we making about Ms (money supply) in this graph? b. Explain carefully what happens to short-term interest rates if more money is put into circulation. c. In the Loanable Funds Market, which curve represents the 'savers'? Which curve represents the 'borrowers'?
