Based on keynesian model, analyze effect of increase in money supply on level of real income,...

Based on keynesian model, analyze effect of increase in money supply on level of real income, price level, money wage and interest. Please analyze with diagram

Expert Solution

The Keynesian model believes that changes in the money supply would not affect the price level (value of money) directly however indirectly through other elements such as the interest rate, the level of investment, output, income, and employment. As there is an increase in money supply (other things remaining the same), the interest rate will be lowered because the availability of quantity of money to satisfy speculative motive also increases. As it stimulates investment spending thus will cause a rise in demand in the economy; and as result the factories produce more, and consequently the real output and real income increases. The price level also increases in the short-run.

In the enclosed figure an increase in money supply from О to M, the output level also increases along the ОТ portion of the OTC curve. Similarly an increase in money supply increases aggregate money demand on investment and consequently causes a decline in the rate of interest; and as a result and the price level also increases to OP3

Rahul Sunny answered 2 years ago

Based on the Keynesian model, analyze the effects of an increase in the money supply on...

Based on the Keynesian model, analyze the effects of an increase in the money supply on the level of real income, the price level, the money wage and the interest rates. 10 markhs

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