Chapter 5R, Problem 21MCQ

To determine

The correct option that defines the money supply curve.

Answer to Problem 21MCQ

Option b is correct.

Explanation of Solution

Explanation for the correct option:

b.

The money supply depends on the limit set by the Federal Reserve which is irrespective of the money value. The money supply curve is vertical. It is shown as follows:

  

As per the above graph, the quantity of money supplied remains constant irrespective of changes in interest rates. Therefore, option b is correct.

Explanation for incorrect options:

a.

The money supply curve is vertical as its quantity supply is set by Fed. Therefore, option a is incorrect.

c.

The money supply curve is not horizontal as the limit is set by Fed where quantity is fixed even when there is a change in interest rates. Therefore, option c is incorrect.

d.

The demand curve of money is downward sloping instead of the supply curve. The demand for money varies with varying interest rates. Therefore, option d is incorrect.

e.

The money supply curve is vertical rather than U-shaped. Therefore, option e is incorrect.

Economics Concept Introduction

Money supply curve: The money supply curve refers to the curve that depicts the relationship between money supplied and the interest rate that prevails in the market.