Answer to Question #102118 in Macroeconomics for komalpreet kaur

Question

Trace through with the assistance of diagrams, the effect of a fall in the money supply on
investment demand and aggregate demand. (3 marks)
What will happen to real GDP, unemployment and inflation? (3 marks)
What factor(s) will determine the effectiveness of this policy? (4 marks)

Answer 1

A fall in the money supply will increase the interest rate, as a result both investment demand and aggregate demand will decrease.

Real GDP will decrease, unemployment will increase, and inflation will decrease.

Such factors as the period of business cycle, the amount of decrease, the level of inflation will determine the effectiveness of this policy.