This preview shows page 1. Sign up to view the full content.
Unformatted text preview: y are not likely to offset changes in the money supply. • An increase in the money supply will raise aggregate demand and increase both Real GDP and the price level in the short run and increase the price level in the long run. • A decrease in the money supply will lower aggregate demand and decrease both Real GDP and price level in the short run and decrease price level in the long run. Money and Interest Rates
What economic variables are affected by a change in the money supply?
• • • • The supply of loans Real GDP The price level The expected inflation rate en market operation to affect the money supply, the government sells assets in exchange for money, this sale ll decrease the money supply - this is an open market sale... an open market purchase is when the government ys bond and gives out money. this all affects the loanable funds market AD shifts outward will cause an increase in real GDP, an increase in real GDP means an increase in income, as get more money they save more, this is saying C is constant, there is a robust business climate which causes increase in I which means you demand more loanable funds to pay for the I the money supply will increase causing the price level to increase, this erodes you purchasing power, which means that you can buy less with your money, which is real income goes down, people borrow more to finance their consumption, this means you nominal income is held constant an increase in higher price, you expect a higher rate of inflation to buy stuff. households may reduce savings so that they can consume more today so they can buy more before prices rise, some people may ha borrow more to buy more today, which means an increase in the demand of loanable funds Money and Interest Rates
A change in the money supply creates a change in interest rates due to a change in: Liquidity Effect: the supply of loanable funds. Income Effect: Real GDP. Price Level Effect:...
View Full Document
- Spring '08
- Interest Rates