Answer the following question:

Suppose nominal income increases, as in Figure attached, and that the central bank wants to keep the interest rate unchanged. How does it need to adjust the money supply? (Show in a diagram).

MS Interest rate, i A' A Figure 4.3 Ma' The effects of an increase Ma (EY' > EY) in nominal income on the interest rate An increase in nominal income leads to M an increase in the interest rate. Money, M