Nominal GDP and Transactions
The question
In the country of Sarelia, nominal gross domestic product rises sharply as both output and the price level increase, so households and firms carry out more transactions each month. Show the effect of this change on the money market, assuming the central bank takes no action. Show the effect on the Money Market graph.
Drag a curve, or use the arrow buttons. Want the free-play version with every control? Open this graph in the sandbox.
Nominal GDP and Transactions: the worked answer
On the Money Market graph, Money demand (MD) shifts right.
Why Money demand (MD) shifts right
Households and firms hold money primarily to make transactions, and a higher nominal GDP means more and larger transactions at every interest rate. The desired money holdings therefore increase, shifting the MD curve to the right. The money supply is fixed by the central bank, and since the central bank takes no action, the vertical MS line does not move.
What happens to the equilibrium
The equilibrium nominal interest rate rises while the quantity of money is unchanged.
The mistake students make on this one
The frequent error is shifting MS right, on the logic that a bigger economy "has more money circulating." The quantity of money in existence is set by the central bank, which the stem says did nothing; a larger volume of transactions changes only how much money people want to hold, so the adjustment happens through a higher interest rate.
On exam day
When a stem changes the price level or income and explicitly says the central bank takes no action, the answer is always MD alone, with the interest rate moving in the same direction as MD.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when Money demand (MD) shifts right and every other curve on the Money Market graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
More Money Market scenarios
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