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14) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if re
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If real GDP increases, it will increase the demand for money because people will demand more money when they have more income. This will shifts the demand curve for money upwards and raise the rate of interest. Interest rate rises because at the existing rate of interest, there is an excess demand for money which encourages competition among savers to raise interest rate on money

(M/P) Real interest rate, r i1 (MIPP Real money balances, MP M/P 2

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