Chapter 15 Page 366 - 74 Full Notes

Chapter 15 Page 366 - 74 Full Notes - 15-1Diagram 1:...

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Unformatted text preview: 15-1Diagram 1: Aggregate Demand Effects of Changes in Money SupplyClosed EconomyMS1Interest Rater1A15-2Quantity of MoneyMD115-3Diagram 1: Aggregate Demand Effects of Changes in Money SupplyClosed Economy MS1Interest Rater1MS2r2A15-4Diagram 1: Aggregate Demand Effects of Changes in Money SupplyClosed EconomyQuantity of MoneyMD1MS1Interest RateMS2A15-5Diagram 2:The Aggregate Demand CurveClosed EconomyQuantity of MoneyMD1r1r2BMD2r315-6Diagram 2: The Aggregate Demand CurvePrice LevelQuantity of MoneyAD1PAY115-7Closed EconomyPrice LevelAD1PAAD215-8Quantity of MoneyY1Y215-9Aggregate Demand Effects of Changes in Money SupplyClosed EconomyoInitially the economy is in equilibrium at point AoMS = MS1or = r1oThe Bank of Canada increases the money supply from MS1 to MS2oThe interest rate falls from r1 to r2oA fall in the interest rate increases the quantity of demanded of goods and services at the given price leveloRecall the interest rate effect on investment a fall in the interest rate causes investment spending to riseoConsumption spending also rises when r falls to r2oTherefore, the aggregate demand curve shifts from AD1 to AD2 and output rises from Y1 to Y2oY has increased to Y2 because firms respond to the increase in aggregate demand by increasing outputoThe increase in the demand for goods and services has caused a rise in the transactions demand for moneyoThe rise in the transactions demand for money causes the interest rate to increase from r2 to r3oSo, the increase in the transactions demand for money has caused a partial reversal in the 15-10interest rate decline and smaller than otherwise increase in outputoThe economy moves to point B15-11...
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Chapter 15 Page 366 - 74 Full Notes - 15-1Diagram 1:...

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