Question

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. As we can see in the first diagram, there has been increase in the money supply which has led to increase in the quantity of credit and decrease in the price of money (interest rates).

Also there has been increase in the inflation due to increase in money supply, this represents the decrease in purchasing power of money.

S2 SRAS si -t money of Price level Pal E Pi X Price 1 ADE D ADI Q2 Q, Yi Y Real GDP per year Quantity of money

2. As we can see in the second diagram, there has been decrease in the money supply which has led to decrease in the quantity of credit and increase in the price of money (interest rates).

Also there has been decrease in the inflation due to decrease in money supply, this represents the increase in purchasing power of money.

2 S2 "SRAS si P2 Interent rate Price level. > D ADE VAD, IS da Qi Real Gop Quantity of money

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