Since money supply is assumed to be independent of the market interest rate, it s represented by a vertical line. A change in the nominal interest rate will lead to movements along the demand function. An increase in Ms will shift the Ms function to the right and decrease the nominal interest rate. When the Fed wants to change interest rates, it typically buys or sells government bonds from private banks. This transaction affects the quantity of reserves held by banks.
Banks regularly borrow from each other to meet short term reserve requirements.
This market of borrowing and lending of bank reserves is called the federal funds market and the interest they charge each other is called the federal funds rate. When the Fed changes the amount of reserves in this market by conducting open market operations, it affects this federal funds rate. When the federal funds rate changes all other interest rates change since market interest rates are closely tied to the federal funds rate. So the Fed does not directly change interest rates. Its open market operations cause changes in the interest rate.