Question

Case 3: 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

Rise in demand of loanable funds will shift its demand curve to its right which raise rate of interest from "i" to "i1" as well as quantity of funds traded from "Q" to "Q1" as depicted in diagram below.

interest 3. - ^. D 44 connable funds

Aggregate demand = Consumption + Investment + Government spending + Exports - Imports

Investment and Interest rate have negative relationship with each other. Rise in rate of interest will reduces investment level which reduces aggregate demand and shift aggregate demand curve to its left which reduce price as well as quantity traded.

Fall in price raise purchasing power of money as the same money can buy more units than before.