Question #5: If there is an increase in the money supply what affect would there
ID: 1114259 • Letter: Q
Question
Question #5: If there is an increase in the money supply what affect would there be on the following (increase, decrease, or remain the same for questions a to h) a. The LM curve b. IS curve c. Aggregate Demand d. Output in the short run (Keynesian Model) e. Real interest rates (short run) f. Employment g. Prices (long run) h. Output (long run) i. How does the Keynesian model differ from the Classical model in the short run? j. How does the Keynesian model differ from the Classical model in the long run?Explanation / Answer
(a) Increase in money supply will shift the money supply curve rightward, and LM curve will shift rightward as well Increase).
(b) Increase in money supply will leave IS curve unchanged.
(c) Higher money supply will increase aggregate demand.
(d) In short run, output will increase.
(e) Higher money supply will decrease real interest rate in short run.
(f) As aggregate demand rises, employment increases.
(g) In short run, higher aggregate demand will increase price level, which will raise cost of inputs. In long run, firms will lower supply, and aggregate supply will fall, increasing the price level further still.
(h) In new long run equilibrium, fall in aggregate supply will restore output to original potential output level.
NOTE: As per Chegg answering guidelines, first 8 parts are answered.