Money market with inflation and rising money supply, Macroeconomics

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Q. Money market with inflation and rising money supply?

1339_Money market with inflation and rising money supply.png

Figure: The money market with inflation and rising money supply

If we let πM refer the growth rate in money supply, we can determine the following. For a given Y, R will increase if π > πM (prices increase faster than money supply) and R will fall if πM> π. R is unchanged if π = πM.

For instance, when π > πM, MD curve glides out to the right faster than MS curve that is why R increases.


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