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.