1) At first we choose a point in quadrant I. Let us call this point as B. Now let us look at the Y (national income) and I (interest rate) at point B and compare it with point C. I Y B i1 Y1 C i1 Y2 Same Y1*Y2 As we see from the diagram, the national income at point C is greater than the national income at point B. We also know that money demand is positively correlated with national income and negatively correlated with the interest rates. In other words; Md,t=f(Y+) Md,p=f(Y+) (1) so we can say that Md=f(Y+,i-) (2) Ms =f(i-) At point C the national income is higher then the national income at point B;so we can easily say that money demand at point C is greater than money demand at point B. The money supply stays at the same level but the demand for money decreased. In this case we have excess supply in money market. Let us look at the goods market; As it is seen from the drawing above, the national income at point B is same as the national income at point D. But the interest rate at point B is greater than the interest rate at point D. We know that savings are positively correlated with the interest rates S=f(i+) (3) The interest rate at point B is greater than the interest rate at point D.For this reason savings at point B are greater than point D. From equations (1) and (2) we see that money demand decreases with the increasing interest rates.This means money demand at point B (Md,B) is less than money demand at point D (Md,D) . We have less demand for increasing supply,which means aggregate demand*aggregate supply So we say that we have excess supply in goods market. For the points in quadrant I we can say that, if any point is selected in this quadrant, there is excess …
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