Increase In Money Supply Effect On Real Goods Market
Increase In Money Supply Effect On Real Goods Market
Increase In Money Supply Effect On Real Goods Marketing

An increase in the money supply (MS) causes an increase in the real money supply (MS / P$) since P$ remains constant. In the diagram, this is shown as a rightward shift from MS ′/ P$ to MS ″/ P$. At the original interest rate, real money supply has risen to level 2 along the horizontal axis while real money demand remains at level 1. The Effect of Changes in Supply: Changes in supply cause a change in price and a movement along the demand curve. Initially, an increase in supply will cause a surplus. This surplus will drive down the price and result in an extension in demand, as shown in Fig. A decrease in supply will have the opposite effect.

Key Takeaways Inflation arises whenever there is too much money chasing too few goods. A money supply increase will lead to increases in aggregate demand for goods and services. A money supply increase will tend to raise the price level in the long run. A money supply increase may also increase.

learning objective

Learn how a change in real GDP affects the equilibrium interestrate.

Finally, let’s consider the effects of an increase in real grossdomestic product (GDP). Such an increase represents economicgrowth. Thus the study of the effects of a real GDP increase is thesame as asking how economic growth will affect interest rates.

Increase In Money Supply Effect On Real Goods Market

GDP may increase for a variety of reasons, which are discussedin subsequent chapters. For now, we will imagine that GDP increasesfor some unspecified reason and consider the consequences of such achange in the money market.

Increase In Money Supply Effect On Real Goods Market

Suppose the money market is originally in equilibrium atpoint A in Figure 7.11.1 withreal money supply (M^{S}/P_{$}) and interestrate (i_{$}’). Suppose real GDP((Y_{$})) increases, ceteris paribus. Again, the ceterisparibus assumption means that we assume all other exogenousvariables in the model remain fixed at their original levels. Inthis exercise, it means that the money supply ((M^{S}))and the price level ((P_{$})) remain fixed. An increasein GDP will raise the demand for money because people will needmore money to make the transactions necessary to purchase the newGDP. In other words, real money demand rises due to thetransactions demand effect. This increase is reflected in therightward shift of the real money demand functionfrom L((i_{$}, Y_{$}’))to L((i_{$}, Y_{$}^')).

Figure(PageIndex{1}): Effects of an Increase in RealGDP

Increase In Money Supply Effect On Real Goods Marke

At the original interest rate, (i_{$}’), realmoney demand has increased to level 2 along the horizontal axiswhile real money supply remains at level 1. This means that realmoney demand exceeds real money supply and the current interestrate is lower than the equilibrium rate. Adjustment to the higherinterest rate will follow the “interest rate too low” equilibriumstory.

The final equilibrium will occur atpoint B on the diagram. As the interest raterisesfrom (i_{$}’) to (i_{$}^″),real money demand will have fallen from level 2 to level 1. Thus anincrease in real GDP (i.e., economic growth) will cause an increasein average interest rates in an economy. In contrast, a decrease inreal GDP (a recession) will cause a decrease in average interestrates in an economy.

Key takeaways

An increase in real gross domestic product (i.e., economicgrowth), ceteris paribus, will cause an increase in averageinterest rates in an economy. In contrast, a decrease in real GDP(a recession), ceteris paribus, will cause a decrease in averageinterest rates in an economy.

exercise

Jeopardy Questions. As in the populartelevision game show, you are given an answer to a question and youmust respond with the question. For example, if the answer is “atax on imports,” then the correct question is “What is a tariff?”
- The term used to describe a percentage increase in real GDPover a period of time.
- Of increase, decrease,or stay the same, the effect on the equilibriuminterest rate when real GDP decreases, ceteris paribus.
- Of increase, decrease,or stay the same, the effect on the equilibriuminterest rate when real GDP increases, ceteris paribus.

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The paper 'How Markets Work: Supply, Demand, and the Real World' is a worthy example of an assignment on macro and microeconomics. The statement ‘The increase in per capita pork consumption and the decrease in per capita beef consumption highlighted in the article can be explained by increasing demand for pork and decreasing demand for beef’ indicates that the decrease in demand for beef is attributed to an increase in demand for pork. Over the years the consumption of pork has risen gradually as it is evident with an increase from 14kg/capita of pork to25kg.capita of pork. The increase in consumption of pork means that fewer people prefer beef. Therefore, as a result, the consumption of beef has somewhat declined over the years from 40.4 kg per capita of beef in 1972 to 33.6 kg per capita of beef in 2014 (Cawood 2014). This is attributed to the fact that despite being an oversupply of beef in the market the price of beef still remains relatively high. The price of pork, on the other hand, is deemed to be fair meaning that individuals will opt into buying pork rather than beef. In addition to this, the issue of protein content in meat has greatly influenced the type of meat individuals to consume. This is attributed to the fact that despite beef being the most popular meat, the protein content in beef is low compared to pork. This is to say that an individual will have to consume more beef in order to achieve a certain protein content. However, a person consuming pork will have to consume less pork to achieve the same protein content as someone consuming beef (Cawood 2014).

Therefore, due to the high protein content in pork more people have shifted from beef to pork reducing the demand for beef. This in return affects the amount of beef consumed in a single year in Australia. However, the decline in consumption of beef is not restricted to competition from pork alone. This is attributed to the fact that some of the traditional beef-based cuisines have trimmed the amount of beef consumed in Australia. The best example is stir-fried, which traditionally was beef based but recent years have seen the decline in the use of beef as the main component.

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Increase In Money Supply Effect On Real Goods Market

Increase In Money Supply Effect On Real Goods Market

Increase In Money Supply Effect On Real Goods Marketing