Graphically show how a change in the money supply leads to a change in the price...

Graphically show how a change in the money supply leads to a change in the price level but not to a change in real GDP.

Expert Solution

According to many theories of macroeconomics, a rise in the supply of money should decrease interest rates in the economy. An increase in the money supply means that more money is accessible for borrowing in the economy. This growth in supply–in accordance with the law of demand–tends to decrease the price for borrowing money. When it is easier to obtain money, rates of consumption and lending (and borrowing) both lean to go up. According to many theories of macroeconomics, a rise in the supply of money should decrease interest rates in the economy. An increase in the money supply means that more money is accessible for borrowing in the economy. This growth in supply–in accordance with the law of demand–tends to decrease the price for borrowing money. When it is easier to obtain money, rates of consumption and lending (and borrowing) both lean to go up.

Diagram:-1

The long-run aggregate supply curve is upright which regards economists' beliefs that changes to in the aggregate demand only short term change the economy's total output.

In the long run, money is neutral: shifts in the money supply affect only the price level in the long run.A rise in AD due to an expand in the money supply changes the AD curve up to the right. Equilibrium shifts from point A to B in the short run. Costs will eventually enlarge as well. So, the SRAS curve will move up to the left. Long-run equilibrium is always on the LRAS curve at the economy's potential level of GDP. Changes in aggregate demand do not have a long lasting effect on GDP, only on the price level.

Diagram:-1

In the long run, money is neutral: shifts in the money supply affect only the price level in the long run.A rise in AD due to an expand in the money supply changes the AD curve up to the right. Equilibrium shifts from point A to B in the short run. Costs will eventually enlarge as well. So, the SRAS curve will move up to the left. Long-run equilibrium is always on the LRAS curve at the economy's potential level of GDP. Changes in aggregate demand do not have a long lasting effect on GDP, only on the price level.

Diagram:-2

Rahul Sunny answered 2 years ago

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