Nominal interest rate is the rate before inflation. Understand how money supply and demand are combined to determine nominal interest rates in the economy. These explanations are accompanied by relevant charts, which will help to illustrate these economic transactions. Like many economic variables in a fairly free market economy, interest rates are determined by supply and demand forces. Specifically, nominal interest rates, the monetary return on savings, are determined by the supply and demand of money in the economy. Obviously, there are more than one interest rate in an economy and even more than one interest rate on government-issued securities. These interest rates tend to move in series, so by observing a representative interest rate, we can analyze the change of the overall interest rate. Like other supply and demand maps, money supply and demand are drawn on the vertical axis of money price and the horizontal axis of money quantity. But what is the “price” of money? It has been proved that the price of money is the opportunity cost of holding money. Because cash can’t earn interest, when people choose to deposit their wealth in cash, they give up the interest earned by non-cash savings. Therefore, the opportunity cost of money, that is, the price of money, is the nominal interest rate. The supply of funds can be easily described in graphics. It is decided by the Federal Reserve, more commonly known as the Federal Reserve, and therefore is not directly affected by interest rates. The Fed may choose to change the money supply because it wants to change nominal interest rates. Therefore, the money supply is represented by the vertical line of the amount of money that the Fed decides to invest in the public domain. When the Fed increases the money supply, the line moves to the right. Similarly, when the Fed reduces money supply, the line moves to the left. As a reminder, the Fed usually controls the supply of money through open market operations, where it buys and sells government bonds. When it buys bonds, the economy receives cash from the Federal Reserve for purchases, and the money supply increases. When it sells bonds, it accepts money as payment and the money supply decreases. In fact, even quantitative easing is only a variation of this process. Like other markets, equilibrium prices and quantities are found at the intersection of supply and demand curves. In this chart, the supply and demand of money combine to determine the nominal interest rate of an economy. When the quantity of supply equals the quantity of demand, the market will reach equilibrium, because excess (supply exceeds demand) drives prices down, while shortage (demand exceeds supply) drives prices up. Therefore, a stable price is a price that has neither shortage nor surplus. As far as money markets are concerned, interest rates must be adjusted so that people are willing to hold all the currencies the Fed is trying to put into the economy, and they will not ask to hold more currencies than they already have.