Question

Graphically represent the impact of the Economic Impact Stimulus providing large loans to small and large businesses in the USA will have on the equilibrium interest rate as well as equilibrium quantity of money available in the market!

Will that cause the inflation to increase or decrease? Explain!

Answer 1

Offering loans to small business and large business will raise the money supply in the market shifting money supply curve from Ms to Ms1 causing rate of interest to fall from "i" to "i1" and quantity of money to rise from "Y" to "Y1".

As money supply rises, people will have more money in their hands which will raise their willingness to pay for goods which eventually raise aggregate demand in the economy from AD to AD1. It results in price rising from P to P1 which results in inflation rising.