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Money Supply Expansion and the AD-AS Model


Consider the accompanying diagram and fill in the blanks in the paragraph below.

Created for Copyright 2016. All rights reserved.

Initially, the economy is in long-run equilibrium at Point A with a price level of

and producing

. Suppose there was a substantial increase in the money supply. As a result,

would shift to the right because of higher investment spending stimulated by lower

. The economy would move to

in the diagram.