Figure 24-4.On the figure,MS represents money supply and MD represents money demand.
-Refer to Figure 24-4.Suppose the current equilibrium interest rate is r₁.Let Y₁ represent the corresponding quantity of goods and services demanded,and let P₁ represent the corresponding price level.Starting from this situation,if the Federal Reserve increases the money supply and if the price level remains at P₁,then

Question

Figure 24-4.On the figure,MS represents money supply and MD represents money demand.

-Refer to Figure 24-4.Suppose the current equilibrium interest rate is r₁.Let Y₁ represent the corresponding quantity of goods and services demanded,and let P₁ represent the corresponding price level.Starting from this situation,if the Federal Reserve increases the money supply and if the price level remains at P₁,then

Quizplus · Accepted Answer

If the Federal Reserve increases the money supply and the price level remains constant, the money demand curve shifts to the right (from MD to MD'). This leads to a lower equilibrium interest rate (rS'1U1B1) and higher quantity demanded of goods and services (YS'1U1B1). Therefore, there will be an increase in the equilibrium quantity of goods and services demanded. There is no indication that the firms' borrowing decisions will change in this scenario.