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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Starting with a position of long-run equilibrium, use the monetarist model to graphically portray what happens to the price level and Real GDP in the short run and in the long run as a result of (a) a rise in the money supply and (b) a decline in velocity.

(a)

To determine

The price level and GDP in the short run and long run.

Explanation

Figure 1 shows the aggregate demand and aggregate supply curves.

The horizontal axis of Figure 1 measures the real GDP, and the vertical axis measures the price level. The initial short run aggregate supply curve is SRAS1, and the initial aggregate demand curve is AD1. The initial equilibrium is given by point 1. When the money supply increases, the aggregate demand increases and shifts the aggregate demand to AD2. The rightward shift of the demand curve shifts the equilibrium to point 2, and the real GDP and the price level increase...

(b)

To determine

The consumer surplus and the producer surplus.

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