The Liquidity money curve is a series of points combined from the money market.

It illustrates the relationships between liquidity preferences and a supply of money. Each point reflects given income and interest rates on horizontal and vertical axes. When interest rate is very low, people have no special intention to holding idle cash. Unless the money hold to pay for goods and services anticipate buying. Or people are more likely to borrow money out of bank in order to pay for cars, or houses. For example: famers, manufactures and other businesses have more chances to borrow money to invest in equipments, inventories, and buildings. When interest rate is high, people are more likely to put their money in the bank. Businesses gradually postpone expansion and banks slowly lend less. Consumers realize they are not as wealthy as they were, and most likely put off purchases. Another example: In august 1979, Fed chairman Paul Volker was unable to control money supply. In result of prime rate jump up to 20% in 1982, and inflation rate rose up to more than 13% in 1980.

Reference: Farnham, P. G. (2010). Economics for managers (2nd ed.). Upper Saddle River, NJ: Pearson Education Inc., Published as Prentice Hall.

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