5. A. The initial impact of a rise in the nominal money supply will be to...

5. A. The initial impact of a rise in the nominal money supply will be to shift which

curve(s)?

a. IS

b. SRAS

c. IS and MP.

*d. AD and MP

e. AS and AD

B. Thoroughly explain using an example with graphs.

Solutions

Expert Solution

(A) Option (d)

A rise in nominal money supply increases aggregate demand, shifting AD curve rightward. It also shifts money supply curve, thereby shifting MP curve rightward.

(B)

In following graph, MD0 & MS0 are initial demand and supply curves for money, intersecting at point A with initial interest rate r0 and quantity of money M0. Next, money supply rises, shifting MS0 rightward to MS1, intersecting MD0 at point B with lower interest rate r1 and higher quantity of money M1.

As a result, MP curve shifts rightward. In following graph, MP0 shifts rightward to MP1, intersecting IS0 at point B with higher interest rate r1 (> r0, original interest rate) and higher output Y1 (> Y0, original output).

Higher money supply and lower interest rate boosts aggregate demand, shifting AD curve rightward. In following graph, AD0 shifts rightward to AD1, intersecting SRAS0 at point B with higher price level P1 (> P0, original price level) and higher real GDP (output) Y1 (> Y0, original real GDP).

Rahul Sunny answered 1 year ago

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