Aggregate supply, or AS, refers to the total quantity of output—in other words, real GDP—firms will produce and sell. The aggregate supply curve shows the total quantity of output—real GDP—that firms will produce and sell at each price level. The graph shows an upward sloping aggregate supply curve. Changes in the money supply affect the economy through a 3 step process. An increase in the money supply causes interest rates to fall. The decrease in interest rates causes consumption and investment spending to rise and so aggregate demand rises. The increase in aggregate demand causes real GDP to rise.

Answered 5 years ago An increase in real GDP will lead to the appreciation of local currency. An increase in real GDP signifies an increase in productivity which will drive the general price level in the economy down. Price level will reduce as per the quantitative theory of money which states that. Inflation can happen if the money supply grows faster than the economic output under otherwise normal economic circumstances. Inflation, or the rate at which the average price of goods or serves. When potential GDP increases, aggregate supply increases and the AS curve shifts rightward. The potential GDP line also shifts rightward. Short-run aggregate supply changes and the AS curve shifts when there is a change in the money wage rate or other resource prices.

Building the Model: Aggregate Supply

What Happens To Real Gdp If Supply Of Money Increase Percentage

The aggregate supply is the relationship between the quantity of real GDP supplied and the price level when all other influences on production plans (the money wage rate, the prices of other resources, and potential GDP) remain constant. The AS curve, as shown in Figure 6.1, is upward-sloping. This slope reflects that a higher price level, combined with a fixed money wage rate, lowers the real wage rate, thereby increasing the quantity of labor employed and, hence, increasing real GDP. The potential GDP line is vertical because it is moving along at both the price level rate and money wage rate, and money prices of other resources change by the same percentage. ⁽²⁰⁾

Why does the AS Curve Slope Upward?

When the price level rises and the money wage rate is constant, the real wage rate falls and employment increases. The quantity of real GDP supplied increases. When the price level falls and the money wage rate is constant, the real wage rate rises and employment decreases. The quantity of real GDP supplied decreases. When the price level changes and the money wage rate and other resource prices remain constant, real GDP departs from potential GDP and there is a movement along the AS curve. ⁽²⁰⁾

What Shifts the Aggregate Supply?

Aggregate supply changes when any influence on production plans, other than the price level, changes. In particular, aggregate supply changes when:

Potential GDP changes
The money wage rate changes
The money prices of other resources change

When potential GDP increases, aggregate supply increases and the AS curve shifts rightward. The potential GDP line also shifts rightward. Short-run aggregate supply changes and the AS curve shifts when there is a change in the money wage rate or other resource prices. A rise in the money wage rate or other resource prices decreases short-run aggregate supply and shifts the AS curve leftward. In this case, the potential GDP line does not shift. ⁽²⁰⁾

Building the Model: Aggregate Demand

Aggregate Demand

The quantity of real GDP demanded is the sum of consumption expenditure ( C ), investment ( I ), government expenditures ( G ), and net exports ( X âˆ’ M ), or:

Y = C + I + G + (X — M)

X = Exports and M = Imports

The relationship between the quantity of real GDP demanded and the price level is called aggregate demand . Other things remaining the same, the higher the price level, the smaller is the quantity of real GDP demanded. In Figure 6.2, the AD curve is downward sloping. Moving along the aggregate demand curve, the only thing that changes is the price level. ⁽²⁰⁾

What Happens To Real Gdp If Supply Of Money Increase Rate

Why does the AD Curve Slope Downward?

There are three reasons for the negative relationship between the price level and the quantity of real GDP demanded:

The buying power of money : When the price level rises, the buying of money decreases and so people decrease consumption expenditure.
The real interest rate : When the price level rises, the demand for money increases, which raises the nominal interest rate. Because the inflation rate does not immediately change, the real interest rate also rises so that people decrease their consumption expenditure and firms decrease their investment.
The real price of exports and imports : When the price level rises, domestic goods become more expensive relative to foreign goods, so people decrease the quantity of domestic goods demanded. ⁽²⁰⁾

What Shifts the Aggregate Demand?

Any factor that influences expenditure plans, other than the price level, changes aggregate demand and shifts the aggregate demand curve. Factors that change aggregate demand are:

Expectations : Expectations of higher future income, expectations of higher future inflation, and expectations of higher future profits increase aggregate demand and shift the AD curve rightward.
Fiscal policy and monetary policy : The government influences the economy by setting and changing taxes, making transfer payments, and purchasing goods and services, which is called fiscal policy. Tax cuts, increased transfer payments, or increased government purchases increase aggregate demand. Monetary policy consists of changes in interest rates and in the quantity of money in the economy. An increase in the quantity of money and lower interest rates increase aggregate demand.
The world economy : Exchange rates and foreign income affect net exports ( X âˆ’ M ) and, therefore, aggregate demand. A decrease in the exchange rate or an increase in foreign income increases aggregate demand. ⁽²⁰⁾

How Monetary Policy Works

When the Fed changes the money supply, it does so in an attempt to change GDP, unemployment, and inflation. Changing the money supply to bring about changes in GDP, the unemployment rate, and the inflation rate is called monetary policy. In the U.S., the Federal Reserve System (not the President, not the Congress) has the responsibility of carrying out monetary policy.

We’ve seen how the Fed can change the size of the money supply, using the three tools of monetary policy (changes in reserve requirements, changes in the discount rate, open market operations). What we need to consider now is how those changes in the money supply work their way through the economy, and what effects they can have on GDP, unemployment, and inflation. The way a change in the money supply works its way through to affect GDP, unemployment, and inflation is called the transmission of monetary policy.

This is important stuff.

What you should know after reading this section is 1) When should the Fed increase the money supply? 2) How will an in increase in the money supply affect GDP, unemployment, and inflation? 3) When should the Fed reduce the money supply? 4) How will a decrease in the money supply affect GDP, unemployment, and inflation? 5) How much control does the Fed have over the money supply?

How Monetary Policy Works: Increasing the Money Supply

What happens to real gdp if supply of money increase formula

Suppose that the Fed increases the money supply. It probably would do so by buying bonds (but the story is the same if it lowers reserve requirements or lowers the discount rate). What happens?

When the Fed buys bonds from banks, it gives those banks more reserves. Banks will then try to lend those excess reserves out. But if banks are trying to lend more, they will have to compete with one another to make those loans. How do they compete with one another to make loans? By lowering the interest rate they charge on those loans. (We can also think of this in supply and demand terms: there is an increase in the supply of money to be loaned out, so the price -- which is the interest rate -- will fall.) So the first thing that happens with an increase in the money supply is that

What Happes To Real Gdp If Supply Of Money Increase