The figure above shows aggregate money demand. Md. and the initial money supply,

Question

The figure above shows aggregate money demand. Md. and the initial money supply, ms' so the nbai equnonum the price level and all other vanaDles (not on the graph) remain the same Which of the following may be the new e a b c d e The use economy fundamentally changed beginning about early 1970s. some highlights for the period Trade-to-GDP ratio increased significantly- the US became more gicaced Both skilled and unskilled immigration to the US increases The US developed a large government detect due to higher government expediter and lower to tax receipts

Explanation / Answer

Initial equilibrium is B but if md rises, then it could have been D and if it lessens it could have been E. On the other hand if ms rises it will be C and if it falls it will be A. The equilibrium condition in the money market is md=ms.

1. If GDP rises then md goes up and new equilibrium is E.

2. If labour supply gets excees then, wage falls and hence price also falls. Due to constancy of velocity of money and output money demand falls as par the Cambridge version of quantity theory of money. Hence, new equilibrium is E as md will go down.

3.It is money market and in standard theory of classical model goverment deficit is in goods market. As in Classical theory Walras law says sum of excess demand is equal to zero. Hence if it is excess demand in goods market there will obviously excess supply in the money market. Thus, new equilibrium is point C.

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