What would the portfolio demand for money look like if it were graphed on a set of axes? What would each axis represent?

What will be an ideal response?

The portfolio demand for money arises because money is an asset which can be substituted with other assets in a portfolio. One could graph the portfolio demand for money on a set of axes where the interest rate would be on the vertical and the quantity of money held would be on the horizontal. The curve would be downward sloping, indicating that the quantity of money held would be lower when interest rates were higher and vice versa. This can be explained in terms of a simple choice between holding money or holding bonds in a portfolio. If interest rates are high, people may expect them to drop. Holding bonds would be a good strategy, because as interest rates drop their prices will rise. Therefore people choose portfolios with low money holdings. The reverse would then be true if interest rates were low and expected to rise; people would choose to hold money instead of bonds.