6. Assuming that the money market is initially in equilibrium, trace through the effects of a rise in the money supply on the money market on the interest rate and also on output, employment and the price level. (2 marks)
Money supply increase will cause the interest rates to decrease, since more money is available to loan out, the "cost" (interest) is lower. Bond prices are the aggregate of PMT/(interest)^t; if the denominator of each of these payments decreases, the number goes up, so bond prices will increase. Decrease of money supply is the inverse.
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