Question

Based on the Aggregate Supply and Aggregate Demand model, and the IS-LM model, graphically illustrate and...

Based on the Aggregate Supply and Aggregate Demand model, and the IS-LM model, graphically illustrate and explain what effect an increase in the money supply will have on the economy. In your graphs, clearly illustrate the short-run and medium-run equilibria.

Draw both the IS-LM and the AD-AS models.

Homework Answers

Answer #1

As a result of an increase in money supply, the LM curve shift rightwards to LM', intersecting the original IS curve at point E', with lower equilibrium interest rate and higher equilibrium output.

Corresponding to an increase in money supply and fall in interest rate, the Investment (I) in the economy increases. Since I is a component of Aggregate demand, the AD curve shifts rightwards to AD'. It intersects the new AS curve at E', with higher equilibrium price level and higher equilibrium output.

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