Question

PART II - GRAPHING EXERCISES (First of two exercise questions - each 15 pts. IF YOUR LAST NAME BEGINS WITH LETTERS M THROUGH Z DO CASE 1. IF YOUR LAST NAME BEGINS WITH LETTERS A THROUGH L DO CASE 2. On this examination copy, on the page below, draw the three graphs required to answer the graphing exercise question specified immediately below. 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 a decreasing supply of money and credit.

Answer 1

1) Rise in supply of loanable funds will shift its supply curve to its right from S to S1 which reduce rate of interest and raise quantity of funds traded as depicted in diagram below.

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

Investment and Interest rate have negative relationship with each other. Reduced rate of interest will raise investment level which raise aggregate demand and shift aggregate demand curve to its right which raise price as well as quantity traded.

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Rise in price will reduce purchasing power of money as same money can buy fewer units.

2) Decrease in supply of money will shift supply of loanable funds to its left which raise rate of interest and reduce quantity of loanable funds.

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

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

Fall in price will raise purchasing power as same money can buy more units.