Money supply, money demand and economic growth
- Author:
- Prof. Dr. Christian Mueller
Consider exercise sheet 3, complex exercises, LM model.
The below sketch pictures the LM model in the r-ln(L) space. You may play with the GDP growth rate (dY) to visualise the effect of an increase in GDP. The simulation generates the extent to which money supply has to be adjusted in order to keep the interest rate level constant. The upper panel gives the results for ln(L) = ln(M), the lower also for L (=M).
For example, if you assume that GDP increases by 10 percent, change dY to 1.1. You find dY on the left hand control panel (subcategory "Zahl").
Just left-click dY and let GDP grow. You may also choose "animation" to let the computer do the job for you.