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Macroeconomic Theory




                     Notes            20.2   What Happens if there is Autonomous Change in Money Supply,
                                            independent of Change in Price Level?

                                      The purpose with autonomous change in independent money supply from the change in price level
                                      is from that situation in which supply of money increases or decreases on the circulated price level.
                                      in such situation, according to increase or decrease in money supply, LM curve will shift towards
                                      right or left respectively. But price level remains constant, AD will shift on shifting of LM curve: AD
                                      will shift towards right on right shifting of LM curve (because of rise in money supply, on price level
                                      remaining constant): AD will shift towards left on left shifting of LM curve (because of fall in money
                                      supply, on price level remaining constant). These situations are shown in figure 20.2.


                                      Self Assessment
                                      Multiple Choice Questions:
                                        3.   If different price levels and actual GDP are joined then we get the ........................
                                             (a) AD Curve                      (b) GDP Curve
                                             (c) CD Curve                      (d) None of these
                                        4.   A ...........................  is found from the joining of lower level of actual GDP and the higher
                                             level of interest rate.
                                             (a) equilibrium                   (b) new Equilibrium
                                             (c) eisequilibrium                (d) none of these
                                        5.   On shifting the LM curve towards left, there comes a .....................  in the initial equilibrium
                                             of real and monetary fields.
                                             (a) barrier                       (b) interest
                                             (c) price                         (d) none of these
                                        6.   The ................................... is found from the joining of coincidences of actual GDP and Price
                                             level.
                                             (a) curve                         (b) aggregate demand curve
                                             (c) demand Curve                  (d) none of these






                                          Notes    Express your views about derivation of Aggregate Demand Curve from IS-LM
                                                   Model.

                                      From the initial equilibrium point E, the shifting of LM curve to LM  (because of the rise in the money
                                                                                          1
                                      supply on circulated price level) converts the balanced GDP by changing from Y to Y  (in figure 20.2A).
                                                                                                       1
                                      Similar to it (in figure 20.2B) point A becomes point C on being shifted, which shows the rise in actual
                                      GDP or AD, while the price level remains constant on point P. Therefore, the AD curve becomes AD
                                                                                                                    1
                                      on being shifted, which means the high level of aggregate demand on circulated price level. Similarly,
                                      the shifting of LM curve to LM  (because of the reduction in the money supply on circulated price
                                                               2
                                      level) converts the balanced GDP by reducing from Y to Y  (in figure 20.2 A) which is intended from
                                                                                    2
                                      the similar shift from point A to point B. The Figure 20.2 B i.e., the reduction in actual GDP or AD,
                                      while price level remains constant on P. Therefore, AD Curve becomes AD  on being shifted.
                                                                                                 2




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