Answer to Question #248462 in Macroeconomics for Ndangano

Question

Economy is at its equillibrium in the long run, if its nominal money supply increases , how will economy respond in its short run

Answer 1

In the short run, an increase in the nominal money supply will cause a decrease in the average interest rates in an economy. The money supply will exceed money demand and the actual interest rate is higher than the equilibrium rate. Adjustment to the lower interest rate will immediately follow the "interest rate too high" situation. The equilibrium interest rate thus drops while real money supply level rises in an economy.