As Interest Rates Increase, People Economize on Their Holdings of Currency

Essay

As interest rates increase, people economize on their holdings of currency relative to other types of bank deposits, and banks economize on their holdings of reserves relative to deposits.
a. Using the monetary base-money multiplier framework, explain how the money supply changes as interest rates increase.
b. Graphically illustrate money supply and money demand when the nominal interest rate is on the vertical axis and the quantity of money is on the horizontal axis.