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10 ots The money market model shows how the interaction of potential GDP and aggregate demand determines the real GDP in the

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The money market model shows how the interaction of money demand and money supply determines the nominal interest rate in the economy. The money demand curve is downward sloping because people want to hold more money when the interest rate is lower. On the other hand, the money supply curve is vertical.

If prices in the economy increase then the money demand curve shifts outward and the interest rate increases.

To lower the interest rate in the economy, the Federal Reserve Bank can lower the money supply by selling treasury securities or increasing the reserve requirement ratio.

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