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    Effects of Changes in Nominal Money Supply and Price Levels

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    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.

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    Solution Preview

    Please see attachment as well.

    An increase in government purchases shifts the IS curve up and to the right (IS1 to IS2). At the price level, P1, the aggregate quantity of output demanded increases (Y1 to Y2), as shown by the shift of the IS/LM intersection. (top graph)

    Because ...

    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.

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