Question

When the value of money is on the vertical axis, the money supply curve slopes upward because an increase in the value of money induces banks to create more money.
a. true
b. false?

Answer 1

When the value of money increases, it indicates that fewer dollars are circulating in the economy. This creates a deflationary situation. The banks do not "create" money, but through lowering interest rates and other actions, banks can stimulate the release of some of the money being held back. This, in turn, increases demands for goods and services, which allows the producers of those goods and services to increase their prices to help regulate that demand.