Practice Exam 1- Spring 2012

E net capital outflow decreases holding other things

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Unformatted text preview: e the market must stay at r1. In order to restore the equilibrium in the money market, the price level must increase, such that the supply of the real money balances shifts to the left and intersects with the new money demand function at C with r1. b. [5 pts] Your income increases. Be specific to changes in the money demand function. r M/P1 M/P2 B r1 C A P↓ Y↑ e L(r + π 1, Y2) e L(r + π 1, Y1) M/P When the income increases, the demand for real money balances increases for every value of the real interest rate. In terms of the graph, this is represented by a rightward shift in the money demand function. This change in the money demand function moves the market from A to B. As in part (a), B cannot be a new equilibrium in this market because there will be a discre...
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