Macroeconomics, 2nd Edition by Pearson

410

MACROECONOMICS

supply curve to

AS

1

, there is a rise in the price to

P

1

and a decline in the real

output to

Y

1

[see Figure 15.9(B)].

With the interest rate increasing above

i

*, the central bank increases

the money supply to

M

1

, and this results in an outward shift of the aggregate

demand curve to

AD

1

. The money supply is increased until the target rate of

interest

i

* is achieved that occurs when the

LM

curve is back at

LM

(

M

0

/

P

0

).

This requires that the real income to be back at

Y

0

that occurs when the shift in

the

AD

curve due to the expansion in money supply results in an intersection ...