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    Macro Economics: Money and Growth

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    Please help with the following problem. Provide at least 200 words in the solution.

    I used to think that for growth to take place, banks had to lend out more than they had (fractional reserve, credit) and that this would lead to an increase in aggregate demand and production. Apparently, however, if velocity of money increases we can also have growth. Does this mean that if the money supply never increased (credit via banks stopped altogether) that the aggregate demand and subsequent growth to meet that demand could still occur?

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    Solution Preview

    If the money supply is never increased, the aggregate demand curve will not grow. Aggregate demand increases with an increase in money supply because with an increased supply of money, people have more money to spend and banks have more money to lend at a lower interest rate.

    Velocity can be defined as the rate at which money changes hands. If the velocity is high, money changes hands ...

    Solution Summary

    This solution discusses money supply and growth. The explanation is given in 241 words.