An Increase In Real Aggregate Spending Will Shift The Money Market
An Increase In Real Aggregate Spending Will Shift The Money Line
An Increase In Real Aggregate Spending Will Shift The Money Flow

Reading: AB, chapter 10

Consider the economy initially in general equilibrium with r* = 5% and full employment output Y*. Recall, in general equilibrium the labor market is in equilibrium, the goods market is in equilibrium (aggregate demand = aggregate supply) and the money market is in equilibrium. The initial price level is given by P₀. Now suppose the government increases its purchases of goods and services from G₀ to G₁. This increases the aggregate demand for goods and the IS curve shifts up and to the right. The level of demand is determined by the intersection between IS and LM and this is denoted Y^d. At the higher level of government spending the aggregate demand for goods is greater than the aggregate supply of goods, Y*. Firms will see their inventory of goods fall and they will respond by increasing prices. Also, workers will bargain for higher nominal wages to keep their real wage constant. As overall prices and wages rise, the LM curve will shift up and to the left and the real interest rate will rise. As r increases, interest sensitive spending (consumption and investment) falls as we move along the IS curve toward the new general equilibrium at r = 8%. At the new equilibrium, output is again Y* but the real interest rate and the price level are higher. Also, the higher amount of government spending has crowded out some private consumption and investment expenditure due to the higher real interest rate. The end result of the increased level of government spending is no increase in real output but the composition of demand has changed: more government spending and less private spending.

An Increase In Real Aggregate Spending Will Shift The Money Market

An increase in real aggregate spending will shift the money: a. Supply curve leftward. Supply curve rightward. Demand curve rightward.
Unknowns about an individual's or company's economic future can spur higher saving and low spending, which would decrease the amount of demand and thus shift the curve. On the other hand, higher anticipated profits or paychecks can increase spending and boost the aggregate demand curve.
(a) Assume an increase in money demand. This implies a leftward shift of the LM curve, thus an increase of the real interest rate. To bring it back to the target r., all the monetary authority can do is shift the LM curve back to its original place with an increase in the money supply.
Chapter 13 - with answers. The interest-rate effect suggests that: A. A decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. An increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.

An Increase In Real Aggregate Spending Will Shift The Money Line

https://treegeneration.amebaownd.com/posts/23003451. [Next Slide] [Contents for Lecture 9] [Slides from Lecture] [301 Homepage]

Last updated on July 22, 1996 by Eric Zivot.

An Increase In Real Aggregate Spending Will Shift The Money Flow

Real money making apps in play store. Earn money talktime app. Classical economists contend that an increase in the nominal money supply will shift the LM curve down, causing output to increase. Not increase the real money supply.