Money Market - Aggregate Demand

$MV=PT$ and $M=kPy$

1. $M=300$, $V=4$

$$\begin{array}{rl}MV& =PT\\ 300\times 4& =12\times 100\\ 1200& =1200\end{array}$$

2. increase to $M=400$, $V=4$

$$\begin{array}{rl}MV& =PT\\ 400\times 4& =16\times 100\\ 1600& =1600\end{array}$$

Price gets changed.

The aggregate demand curve is downward sloping.

• We derive the aggregate demand function using Fisher’s demand functions, where $MV=PT$, in which $M=300,V=4,T=100$ automatically $P$ will be 12, where $MV=1200$ will be equal to $PT=1200$ when you plot the same on the demand curve, we see that at any point on aggregate demand curve $PT=Py=1200$
• Suppose money stock increases to $400$, $V$ remains $4$ , $T$ remains at $100$. $P$ goes to $16$ where $MV=1600$ and $PT=1600$.
• Increase in money supply would lead to shift in aggregate demand curve to the right.

  Transclude of Money-Market---Aggregate-Demand-2024-10-30-09.55.40.excalidraw

Successive increase in money stock $M_1$ to $M_2$ to $M_3$ would shift the aggregate demand curve to the right $Y_1^d$ to $Y_2^d$ to $Y_3^d$. But one price level output is completely supply driven is unchanged.

• [M.P is not effective]
• [Any increase in money supply will only lead to change in the Price level]