Supply is reduced by price increases over time. Supply, but then it decreases in the long run as the real money In the short run it increases due to an increase in the money It is interesting to note the behaviour of the exchange rate As long as the AA and DD curves do not intersect at theĮquilibrium level of output (natural level) then price changes will As prices increase in the long run, the real money supply isĪlso reduced over time (AA curve shifts back left) With prices increasing, aggregate demand is pressured This increases firms costs as workers demand higher wages, Workers and machines are working overtime (AA curve shifts However, as output is above its natural level, this means that
![supply inshort run supply inshort run](https://cdn-a.swap.com/i/shorts-for-girls-athletic-works-16-regular-red-orange-good-condition-spring-summer-cotton-polyester/14272294010-1-356@50.jpg)
As money supply increases, the short run effects describedĪbove will mean that output is pushed above its natural level. If theĬhange IS permanent, the following will happen: Is permanent effects in the long run will not be felt.
![supply inshort run supply inshort run](https://cdn.shopify.com/s/files/1/0507/8853/2406/products/TA-CT-ATXB-5T_eb27c346-0d85-479a-9246-6bb448e22010_600x.png)
Increase is deemed to be permanent or temporary. In the long run it will depend on whether the money supply This increase in the exchange rate makesĭomestic goods more attractive, thus increasing both foreign andĭomestic demand for domestically produced goods. In an open economy where interest parity between countries mustīe preserved the exchange rate will increase (currencyĭepreciation) in order to create the expectation that it will fallįaster in the future. Interest rate down as money demand fluctuations alter people'sĭesire for liquid assets and thus the prices and rates of return on In the short run, an increase in the money supply will push the
![supply inshort run supply inshort run](https://i.pinimg.com/736x/b3/82/ff/b382ff8505b1123d83a7ba2fe656122f--active-wear-running.jpg)
To best understand this it is advisable to familiarise yourself