If the money supply in Problem 4.21 increases by 17,

(a) what happens to the equilibrium level of income and rate of interest?

(b) What are C, I, Mt, and Mw at the new equilibrium?

(a) If the money supply increases by 17, the new LM equation is

The IS equation remains unchanged from (4.54):

Multiplying (4.58) by 2,

Adding (4.59) to (4.57),

Substituting Y = 820 in (4.57) or (4.58),

An increase in the money supply, ceteris paribus, or other things remaining the same, leads to an increase in the equilibrium level of income and a decrease in the interest rate.

(b)

Transcribed Image Text:

Ms = M + Mw 317 0.25Y+124 - 200i = 0.25Y 200i 193 = 0 - - (4.57)