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When The Money Supply Increases
Fed Decrease Money Supply
A Decrease In The Real Money Supply Can Result From
A Decrease In The Money Supply Is Most Likely To
A Decrease In The Money Supply Will

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A decrease in the real money supply caused by an increase in the price level is graphically represented by A movement along the AD curve to the left. The natural rate of unemployment is The unemployment rate that exists when output is assumed to be at its full-employment level. 3) The aggregate demand curve slopes downward because a decrease in the price level means in the real money supply and therefore a level of real spending. A) an increase; higher B) an increase; lower C) a decrease; lower D) a decrease; higher Answer: A Ques Status: Previous Edition.

This Demonstration shows the implications for the economy if the money supply is increased. It uses the four key graphs taught in AP Macroeconomics. Initially, this change decreases interest rates, as seen on the money market graph. This increases the quantity of investment, shown on the investment demand graph, which increases aggregate demand. The increase in price level causes inflation and reduced unemployment, shown on the Phillips curve graph.

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On the money market graph, MS stands for 'money supply' and MD stands for 'money demand.' On the investment demand graph, ID stands for 'investment demand.' On the aggregate supply and demand graph, AS stands for 'aggregate supply' and AD stands for 'aggregate demand.' On the Phillips curve graph, LRPC stands for 'long-run Phillips curve' and SRPC stands for 'short-run Phillips curve.'

Economics Ch 14-17. What's the difference between nominal wages and real wages? Nominal wages is the actual money earned. Real wages is nominal wages minus inflation. ‘Real Wages’ are total worth of all compensation you receive from your employer. Like paid vacation, paid sick leave, medical, life, and disability insurance, retirement contributions are examples. ‘Money Wages’ are the wages where you receive actual money compensation. Most part-time work is for money wages. The amount of money paid is called the money wages. The worker, however, is more interested in the goods and services which he can get with his money wages or otherwise. The amount of goods and services which the labourer actually gets is called his real wages. Distinguish between money wage and real wage. Economists have differentiated between nominal wages and real wages. Nominal wages are the wages received by a worker in the form of money. Therefore, nominal wages are also called money wages. For example, a worker gets Rs. 200 from his/her organization in.

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Contributed by: Matthew Rosenfield(February 2018)
Open content licensed under CC BY-NC-SA

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There are a couple of caveats with regard to the Demonstration. This is how macroeconomics is taught at the high-school level; however, events like the Great Depression of 1929–1936 and the Great Recession of 2007–2014 suggest otherwise. The diagrams in the Demonstration are true when the markets are at equilibrium, there is sufficient slack in employment, and interest rates are above the zero lower bound.

Reference

[1] C. R. McConnell and S. L. Brue, Economics: Principles, Problems, and Policies, 17th ed., Boston: McGraw-Hill Irwin, 2008.

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This was a project for Advanced Topics in Mathematics II, 2017-2018, Torrey Pines High School, San Diego, CA.

Permanent Citation

When The Money Supply Increases

'How Increasing the Money Supply Affects the Economy'
http://demonstrations.wolfram.com/HowIncreasingTheMoneySupplyAffectsTheEconomy/
Wolfram Demonstrations Project
Published: February 15 2018

7.10 Effect of a Price Level Increase (Inflation) on Interest Rates

Learning Objective

Learn how a change in the price level affects the equilibrium interest rate.

Now let’s consider the effects of a price level increase in the money market. When the price level rises in an economy, the average price of all goods and services sold is increasing. Inflation is calculated as the percentage increase in a country’s price level over some period, usually a year. This means that in the period during which the price level increases, inflation is occurring. Thus studying the effects of a price level increase is the same as studying the effects of inflation.

Inflation can arise for several reasons that will be discussed later in this chapter. For now, we will imagine that the price level increases for some unspecified reason and consider the consequences.

Suppose the money market is originally in equilibrium at point A in Figure 7.4 'Effects of a Price Level Increase' with real money supply M^S/P_$′ and interest rate i_$′. Suppose the price level increases, ceteris paribus. Again, the ceteris paribus assumption means that we assume all other exogenous variables in the model remain fixed at their original levels. In this exercise, it means that the money supply (M^S) and real GDP (Y_$) remain fixed. An increase in the price level (P_$) causes a decrease in the real money supply (M^S/P_$) since M^S remains constant. In the adjoining diagram, this is shown as a shift from M^S/P_$′ to M^S/P_$″. At the original interest rate, i_$′, the real money supply has fallen to level 2 along the horizontal axis, while real money demand remains at level 1. This means that money demand exceeds money supply and the actual interest rate is lower than the new equilibrium rate. Adjustment to the higher interest rate will follow the “interest rate too low” equilibrium story.

More intuition concerning these effects arises if one recalls that price level increases will increase the transactions demand for money. In this version, nominal money demand will exceed nominal money supply and set off the same adjustment process described in the previous paragraph.

The final equilibrium will occur at point B on the diagram. The real money supply will have fallen from level 1 to level 2 while the equilibrium interest rate has risen from i_$′ to i_$″. Thus an increase in the price level (i.e., inflation) will cause an increase in average interest rates in an economy. In contrast, a decrease in the price level (deflation) will cause a decrease in average interest rates in an economy.

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