Hi, I’m just trying to understand this situation. If economy in equilibrium, an increase in real money supply will shift the AD curve to the right. If all else hold equal this will actually increase the interest rate isn’t it? However intuition is that if real money supply increases thus the price of money is cheaper and interest rate should go down. Just like what the central banks are doing. To reduce interest rate they will start buying govt bonds and increase the money supply in the market thus reducing interest. So how does my first point hold? Anyone can elaborate? A bit confused here.
money supply increases -> people hold more money than they want -> they start bidding up treasury securities -> price goes up -> interest rate goes down i could be wrong on that, but that’s how i remember it
If money supply increases, AD increases, and prices go up. This causes inflation, which teh Fed fights with increasing rates. True that interest rates went down initially which caused Ad to rise…that’s how I think of it.
There’s another side of this. If aggregate demand shift right, then prices rise and real gdp exceeds potential gdp in the short run. In the long run, supply will reduce do to higher prices, the supply curve shifts left, real gdp settles back to potential Gdp, but prices rise even further. Correct?
mcf Wrote: ------------------------------------------------------- > There’s another side of this. > > If aggregate demand shift right, then prices rise > and real gdp exceeds potential gdp in the short > run. In the long run, supply will reduce do to > higher prices, the supply curve shifts left, real > gdp settles back to potential Gdp, but prices rise > even further. > > Correct? boom
increasing in money supply goods and services are relatively cheaper stimulate consumption and investment for now instead of future withdraw money from securities lower interest rate higher AD push up the price level everything goes back to original but the price level goes up
As money supply increases, this will push interest rates down. Think of it like a manufacturer, if supply increases…how are they gonna get rid of the supply—>by dropping prices. Same goes with money supply, the price of money=interest rate will have to drop as a result of the increased money supply. As interest rates drop, this will push AD even higher due to increased consumption (and all other factors that will increase AD). Eventually the economy will move back to where it was (full employment GDP) but with higer prices. From my understanding with the higher prices you could be looking at higher nominal interest rates now.