Chapter 11 The Effect of a Monetary Injection

Chapter 11 The Effect of a Monetary Injection - The Effects...

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Unformatted text preview: The Effects of a Monetary Injection V al ue of Mon ey , 1 / P ( High ) 1 Mon ey su pp ly Pr i ce Lev el , P 1 ( Low ) 3/ 4 1. 3 3 1/ 2 Eq ui l ibr iu m v alue of m oney 1/ 4 A B Mon ey dem an d 0 Quan t i t y fi x ed by t h e B ank of Canad a 2 Eq ui l ibr iu m pr i ce l ev el 4 ( Lo w ) Quan t it y of Mon ey ( Hi gh ) The Effects of a Monetary Injection o o The money market begins in equilibrium There is a monetary injection that creates an excess supply of money and immediately the money supply curve shifts right Now people have more money in their wallets than they want They may buy goods and services with their excess supply of money or make deposits in the bank which will loan out excess money In either case, the injection of money increases the demand for goods and services Because the economy’s ability to produce goods and services has not changed; the greater demand for goods and services causes the price of goods and services to rise Equilibrium moves from point A to point B The value of money decreases from ½ to ¼ as price increases from 2 to 4 The overall price level for goods and services adjusts to bring money supply and money demand back into balance o o o o o o o ...
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This note was uploaded on 10/21/2010 for the course ECON 102 taught by Professor ? during the Fall '08 term at Waterloo.

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Chapter 11 The Effect of a Monetary Injection - The Effects...

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