Figure 34-2 (a) The Money Market (b) The Aggregate Demand Curve -Refer to Figure 34-2. A decrease in Y from Y₁ to Y₂ is explained as follows: A)The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂. B)An increase in P from P₁ to P₂ causes the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂. C)A decrease in P from P₂ to P₁ causes the money-demand curve to shift from MD₁ to MD₂; this shift of MD causes r to increase from r₁ to r₂; and this increase in r causes Y to decrease from Y₁ to Y₂. D)An increase in the price level causes the money-demand curve to shift from MD₂ to MD₁; this shift of MD causes r to decrease from r₂ to r₁; and this decrease in r causes Y to decrease from Y₁ to Y₂.

Question

Quizplus · Accepted Answer

An increase in the price level (P) increases the demand for money, shifting the money-demand curve to the right. This leads to a higher interest rate (r), which in turn reduces investment and overall economic output (Y), explaining the decrease in Y.