FIGURE 27-5 0 0

FIGURE 27-5
0 0
-Refer to Figure 27-5. This economy begins in equilibrium with M S , M D and real GDP equal to potential GDP
With AD0 and AS0) . Now suppose there is an increase in the money supply to $540 billion. The initial response in this economy is

A) an increase in the demand for money, causing a shift of the money demand curve to M 1 , and a fall in
Interest rate to 3%.
B) an increase in the demand for money, causing a shift of the money demand curve to M 1 , and a fall in
The interest rate to 2%.
C) the AD and AS curves shift up simultaneously.
D) a movement down along the money demand curve to a lower interest rate at 2%.
E) an increase in the demand for money, causing a shift of the money demand curve to M 2 and the interest
Rate remains at 4%.