Question

Outline the steps between an increase in the money supply and an increase in equilibrium output

Answer 1

'Money supply' is the total stock of monetary media of exchange available to a society for using it for various economic activities/purposes in an economy.These economic activities mainly include the activity of consumption,investment and saving etc.These activities mainly determine the level of growth and development in an economy.In simple terms,money supply is the quantity of money available in the economy for various economic purposes.'Equilibrium output' is the level of output in the economy where the demand equals supply.Output is the result of production process carried out by the producers in the economy and depends directly upon the demand of those output by the consumers.

Increase in the money supply and the increase in the equilibrium output is closely related and affects each other.This involves various steps explained ahead.As the money supply increases in the economy,the availability and quantity of money increases in the economy.It increases the purchasing power of the people and so they can demand more now.As their consumption of various goods and services increases,the demand and the quantity demanded of various goods and services and this way the demand exceeds the equilibrium supply level of output in the economy which forces the prices to rise up.This provides options of earning more money to the producers and suppliers which encourages them to produce more.This can be only done by investing more,hiring more labourers etc.As the money supply has increased now so they would find it easier to get funds.They continue producing more upto the level it equals the level of demand output in the economy.Hence this way the equilibrium output increases in the economy.We know the investment multiplier relationship which says that the income/output generated in the economy is multiple times the amount invested.