Economic models al Affiliation) Sensitivity in demand for money to changes in nominal Interest rates In US data, changesof money supply in the economy have been expected to affect the nominal rates of interest in the reverse direction. Changes experienced in interest rates may be attributed to changes that are in the supply schedule, changes in demand or changes in both demand and supply schedules (Basu & Kronsjo, 2009). An increase in rates that results from an upward shift in demand of money has a different implication for the cause of economic activity as compared to an equal rise that is attainable to a downward shift in the supply of money.
Consequences of an increase in the money supply on output and the price levelShort-run and long-run effects of changes in supply of money are well understood through analysis of aggregate demand. Increase in money demand in an economy reduces the interest rates since there is an increase in investment and further increase in consumer spending. An increase in supply of money in an economy also increases the demand in goods and services shifting aggregate demand to the right (Basu & Kronsjo, 2009).
This result to increase in aggregate price levels but the aggregate output is back at potential output. In short-run, the economy moves to a new equilibrium where price level aggregate and aggregate output level increases in the short run. In this situation, the level of aggregate is above potential output. When there is a change in money supply, it leads to relative change in the aggregate level of price in the long run. When there is failure in money supply by 25%, there occurs a similar fall in aggregate price level in the long run.
Percentage rise in money supply results to rise in aggregate price level in the long run. Dependence of the answerA consequence of increases in the money supply on output and the price level that has been discussed above depends on both short-term and long term equilibrium. The consequences that are obtained however come in the long-term. Reference Basu, D., & Kronsjo, T. (2009). Economic models. Hackensack, NJ: World Scientific.