Question 39FIGURE 1MSr2P2P1r1MD2ADMD,REFER TO FIGURE 1. A decrease in Y from Y, to Y2 is explained as follows:O A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 tor2; and this increase in r causes Y to deçrease from Y1 to Y2.O An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1;and this decrease in r causes Y to decrease from Y1 to Y2.O An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 tor2; and this increase in r causes Y to decrease from Y1 to Y2.O The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r toincrease from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Aggregate demand curve depicts the inverse relationship between price level (P) and real GDP (Y). An increase in price level from P1 to P2 will increase the demand for money because more money will be needed than before after increase in price level. As a result, the money demand curve will shift to the right. A rightward shift of the money demand curve from MD1 to MD2 increase the equilibrium interest rate from r1 to r2. An increase in interest rate will decrease the investment spending in an economy. A decrease in investment spending will decrease the real GDP from Y1 to Y2. Hence, an increase in price level from P1 to P2 will decrease the real GDP from Y1 to Y2. ------------- Answer: Option (C), i.e., An increase in P from P1 to P2 causes the money demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2 -------------

Answered: FIGURE 1 MS P2 P1 r2 AD MD2 MD1

Business

Economics

FIGURE 1 MS P2 P1 r2 AD MD2 MD1

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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