EC390 Lecture Notes - Lecture 2: Money Supply
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Assuming that output starts at is natural level, P0= m0 - (1/c)*yn: assuming that pe=p0: When, after the medium run adjustment is complete, the price level is doubled, the nominal money supply was doubled from m0 to. 2m0 and once the price level is doubled, the real money supply is the same as it was initially. The doubling of the level of the money stock has no real effects in the medium run: spending shocks, policy in the short and medium runs, with an increase in consumer confidence: A decrease in the money supply (an increase in interest rates) would prevent the change in output. The decrease in the money supply would be associated with the following shifts: Is - no change after initial shift right dues to increase in consumer confidence. The composition of output will change so there is more consumption (due to the increase in consumer confidence) and less investment (due to the increase in interest rates).
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