(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
For part b, you are asked to analyze the effects of an increase in the quantity of money by the Federal Reserve on the aggregate price level and real GDP. We will start with our basic aggregate demand and aggregate supply graph in equilibrium.
(Description)
Using the AD/AS model, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. An increase in the quantity of money by the Federal Reserve increases the quantity of money that people wish to lend, lowering interest rates. On the Figure there are graphs of aggregate supply and demand. Horizontal axis corresponds to the real GDP. Vertical axis corresponds to aggregate price level. Two straight lines (supply and demand) are plotted with supply line starting at origin and bisecting the quadrant and demand line crossing the axes at some equally distant from origin points. Lines intersect at point (Y1,P1). Lines are labeled AD and AS correspondingly.
(Speaker)
As the Federal Reserve increases the quantity of money, banks have more money which they are willing to lend out.
(Description)
On the Figure there are graphs of aggregate supply and demand. Two straight lines (supply and demand) are plotted with supply line AS starting at origin and bisecting the quadrant and demand line AD crossing the axes at some equally distant from origin points. Lines intersect at point (Y1,P1). The line parallel to original demand line and shifted to the right is plotted and labeled AD2. The new point of intersection for original supply and new demand lines is found and labeled (Y2,P2). Arrow along aggregate price level axis is plotted up from P1 to P2. Arrows show the right shift of demand line.
(Speaker)
In order to make more loans, banks must lower the interest rates. The lower interest rates will increase investment spending and consumer spending, leading to a greater quantity of aggregate output demanded at any given aggregate price level.