Question

1. Draw the Purchasing Power of Money, the Price/Quantity and the Quantity of Loanable Funds graphs for the case of anincreasing demand for money and credit.

Answer 1

When demand of money and credit increases or we can say there is demand of loanable funds in the market and shift demand curve of loanable funds to its right which result in rise in rate of interest from "i" to "i1" and raose quantity of loanable funds from Q to Q1.

Rise in rate of interest will reduce level of investment and reduce aggregate demand in an economy.. Fall in aggregate demand reduce price level from P to P1 and output level from Y to Y1.

As price level is reduced, purchasing power of money rises because consumers would be able to buy more of the units of good using same money as before.