Effects of Changes in Nominal Money Supply and Price Levels

A change in the real money supply can result either from a change in the nominal money supply through Federal Reserve policy (holding the price level constant) or from a change in the price level (holding the nominal money supply constant). The change in the nominal money supply causes a shift in the aggregate demand curve, whereas a change in the price level causes a movement along the aggregate demand curve. Explain.

Solution Summary

An increase in government purchases shifts the IS curve and affects aggregate demand. An increase in price affects the real money supply and shifts the LM curve. Aggregate quantity of output demanded also changes. This solution details these effects, both verbally and graphically.