Answer to Question #89422 in Macroeconomics for anderson houla

Question

If the money market is in short-run equilibrium, explain the adjustments that will take place for: i) an increase the in money supply (2 marks)
ii) increase in the demand for money (2 marks)

Answer 1

When money supply increases in the short run, the supply curve shifts to the right and the rate of interest will fall. The surplus money will be used to purchase bonds whose prices will rise causing the interest rates to fall.

 When demand for money increases in the short run, the demand curve to shift to the right. Interest rates will rise which will lead to low investment, high exchange rate and low net export. More money is needed for transaction purposes.