Question

GRAPH

Case 1: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

               Loanable Funds graphs for the case of an increasing supply of money and credit.

Case 2: Draw the Purchasing Power of Money, the Price/Quantity and the Quantity-of-

               Loanable Funds graphs for the case of an increasing demand of money and credit.

Answer 1

If the supply of money or credit increased, the supply for loanable fund increased. This will increase the business expectations and the supply curve of loanable fund will shift to right. This will increase the quantity of loanable funds and decrease the rate of interest also. Thus the purchasing power of money fall down and the price of loanable funds rose. S S iO i1 D YO Y1 Quantity of loanable funds If the demand increased for loanable fund, the demand curve will shift to right. This will increase the interest rate and quantity of loanable funds. The rising interest rate negatively affects the growth rate in economy. This will increase the purchasing power and reduce the level of borrowing. Thus the price of loanable funds increased. Interest rate i1 10 D' YO Y1 Quantity of loanable funds