Using an AD-AS diagram, the short-run and long-run impacts of an increase in the money supply assuming that the economy is initially in long-run equilibrium: Concept Introduction: The Federal Reserve manages the supply of the money and money aggregates in the economy. They increase money supply to stimulate output and employment in the economy. However, an increase in money supply also affects the price level in the economy. The Fed does this through open market purchase of U.S. government securities or by printing money. This increase in money supply results with a decrease in the interest rates. However, such money supply has major effect on the real GDP , the potential output in the economy, and the price levels. One can understand this relationship better with the help of AD-AS (aggregate demand - aggregate supply ) diagram given below.

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(d) Calculate the total change in qı. Total change: 007 (sp) S to vlijnsi (e) B₁ is our original budget constraint and B2 is our new budget constraint after the price of good 1 (p1) increased. Decompose the change in qı (that occurred from the increase in p₁) into the income and substitution effects. It is okay to estimate as needed via visual inspection. Add any necessary information to the graph to support your 03 answer. Substitution Effect: Income Effect:

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Chapter 15, Problem 4P

To determine

To explain:

Using an AD-AS diagram, the short-run and long-run impacts of an increase in the money supply assuming that the economy is initially in long-run equilibrium:

Concept Introduction:

The Federal Reserve manages the supply of the money and money aggregates in the economy. They increase money supply to stimulate output and employment in the economy. However, an increase in money supply also affects the price level in the economy. The Fed does this through open market purchase of U.S. government securities or by printing money. This increase in money supply results with a decrease in the interest rates. However, such money supply has major effect on the real GDP, the potential output in the economy, and the price levels. One can understand this relationship better with the help of AD-AS (aggregate demand-aggregate supply) diagram given below.

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(d) Calculate the total change in qı. Total change: 007 (sp) S to vlijnsi (e) B₁ is our original budget constraint and B2 is our new budget constraint after the price of good 1 (p1) increased. Decompose the change in qı (that occurred from the increase in p₁) into the income and substitution effects. It is okay to estimate as needed via visual inspection. Add any necessary information to the graph to support your 03 answer. Substitution Effect: Income Effect:

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