Can someone please summarize the relationships between money supply, aggregate demand, aggregate supply and interest rates? I am really confused with these questions. Also I am not getting the concept behind the Keysian and Classical economist theory.Can someone explain that in a short way?

With MS, AD, AS, and interest rates, I always remember the 2 graphs. 1) Quantity of money to interest rates (with Money Supply as vertical and Money Demand as downward sloping line 2) GDP to Price Level (with LRAS, SRAS, AD) First with Graph 1, increase in the supply of money will simply shift the vertical line to the right, increasing the Q of Money and decreasing the interest rate. Secondly, think about the effects of decreased interest rates on AD (increased capital investment, consumption, and other factors), this all shifts AD to the right, which creates the Long run disequilibrium. On the same graph, that shift in AD to the right, makes effect on SRAS, which represents producers, who see the increase in demand and wish to produce more, which has an upward pressure on wages and other factor resources, which shifts the SRAS left. Therefore the economy is back in LR equilibrium with increased prices and same GDP. Same way works for the decrease in money supply. Essentially, the Keynesian policy is based on the above process. Monetarists believe in increasing of labor force, technology and capital to increase overall economy.

sdeni Wrote: ------------------------------------------------------- > With MS, AD, AS, and interest rates, I always > remember the 2 graphs. > > 1) Quantity of money to interest rates (with Money > Supply as vertical and Money Demand as downward > sloping line > > 2) GDP to Price Level (with LRAS, SRAS, AD) > > First with Graph 1, increase in the supply of > money will simply shift the vertical line to the > right, increasing the Q of Money and decreasing > the interest rate. > > Secondly, think about the effects of decreased > interest rates on AD (increased capital > investment, consumption, and other factors), this > all shifts AD to the right, which creates the Long > run disequilibrium. > > On the same graph, that shift in AD to the right, > makes effect on SRAS, which represents producers, > who see the increase in demand and wish to produce > more, which has an upward pressure on wages and > other factor resources, which shifts the SRAS > left. > > Therefore the economy is back in LR equilibrium > with increased prices and same GDP. > > Same way works for the decrease in money supply. > > Essentially, the Keynesian policy is based on the > above process. > > Monetarists believe in increasing of labor force, > technology and capital to increase overall > economy. I think there are few things incorrect in this post. You are talking about moving the LRAS curve with the money supply. But normally, these effects are monitored in the short term, not in the long term. Long term effects are more stable than short term. Secondly, I think Moneterist are related to money supply. In your reply you are talking about classical economist. Here is the summary of what each ones blame: Moneterist: Money supply Keynasian: All factors related to AD Classic: Inputs the the production mainly tech

I partly agree to the school of thoughts, however i am not sure if I explained the relationships properly, Hard to do without having a picture to base it on.

I think final outcome is right but fundamentals are little shaky.

Thanks guys… That was of a lot of help!