If the price level is fixed, increment of money supply will increase the real money balance and decrease equilibrium interest rate. Graphically depict and discuss
In a fixed price level scenario, the real money supply is determined by the economy's nominal money supply and the price level. The real money balance can be calculated as the nominal money supply divided by the price level.
When the money supply increases, the real money balance also increases because there is more money in the economy relative to the price level. This means that individuals and firms have a greater purchasing power in real terms.
As the real money balance increases, the demand for money also increases because individuals and firms hold more money to make transactions. This increased demand for money puts downward pressure on the equilibrium interest rate.
Graphically, this can be represented in the money market diagram. An increase in money supply shifts the money supply curve to the right. This causes the equilibrium interest rate to decrease and the equilibrium quantity of money to increase.
Overall, in a fixed price level scenario, an increase in money supply increases the real money balance and decreases the equilibrium interest rate. This can have implications for aggregate demand, investment, and overall economic activity in the short run.