Please show graphically how an increase in the money supply can lead to an increase in real GDP.What is the answer to 3. a)  http://postimage.org/image/7tin4duxj/ Can you show me the visual...

Please show graphically how an increase in the money supply can lead to an increase in real GDP.

What is the answer to 3. a) 

http://postimage.org/image/7tin4duxj/

Can you show me the visual (actual) graph. 

Asked on by avde94

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

There is no way to actually draw graphs on here for questions like these.  However, you can follow this link to find (just scroll down a little) graphs that show this process.

Basically, when you draw one of your graphs for this process, you need to label your vertical axis as the interest rate and the horizontal axis as the amount of money demanded and supplied.  On this graph, you should have a vertical line that is labeled as the money supply.  You then have a line that is slanting downward from left to right and which is labeled as the demand for money.  The point where these lines intersect is, of course, the equilibrium quantity supplied and demanded and the equilibrium interest rate.  When the money supply increases, it is represented by a movement of the vertical line to the right.  When that happens (with your demand curve remaining as is), you get a lower interest rate and a greater amount of money supplied and demanded.

Your second graph has a vertical axis labeled as the price level and a horizontal axis labeled as the Real GDP.  There is an aggregate supply curve that is typically horizontal for a bit, slanting upward for a bit, and vertical at the end.  There is an aggregate demand curve that is slanting downward from left to right.  When aggregate demand increases, the equilibrium point moves to the right.  Depending on where the original equilibrium and new equilibrium points are, the price level can stay the same or increase and real GDP can stay increase or stay the same.

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