In: Economics
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.
(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).