Money Demand

Interest
       rate

Quantity of money

Money Demand

i

M

Expansionary Fiscal Policy and Interest Rates

    (The money supply curve is a 
vertical line because we assume 
that the Federal Reserve is able 
to completely control the money 
supply and changes in the 
interest rate have no effect on 
the quantity of money supplied.)

i_2

M

Money Supply

i_1

1. If the federal government 
increases spending, the demand 
for money will increase as real 
GDP and income rise. . .

2. . . .causing the 
equilibrium interest 
rate to rise, which 
crowds out some 
consumption, 
investment, and 
net exports.

a = 5 (slider from 5 to 6, step 0.01)
u = Vector((0, 0), (10, 0))
v = Vector((0, 0), (0, 10))
f(x) = If[1 ≤ x ≤ 9, ((-0.8) * x) + 4 + a]
M_1 = (5, 0)
M_2 = (5, 9)
p = Segment(M_2, M_1)
A = Intersect(f, p, (5, 5))
Y_A: (0, y(A))
b = Segment(Y_A, A)
N_1 = (0, 5)
N_2 = (5, 5)
c = Segment(N_1, N_2)
B = Point(f)