Impact of Changes in Supply of Money:

Changes in Money Supply would mean the Ms Schedule in figure will shift to M^s' , what would be its consequences? Increase in supply of money would push down the rate of interest in the money market which would make the bears active. As a result of this the speculative demand for money  would start rising till the point where the excess supply of money gets absorbed by the rise in the demand for money and the equilibrium is restored in the money market at r₁  (lower rate of interest) and M₁  (higher quantity of money) levels.

In the figure,  one can see that to raise the interest rate the central bank need to use the contractionary monetary policy and to reduce the interest rate the expansionary monetary policy.

Next we turn to further analysis of money and its linkages with interest rate and level of output.