Worth: Mankiw Economics 5e 244 PART IV Business Cycle Theory: The Economy in the Short Run For example, consider what happens if the Fed reduces the money supply. The quantity equation, MV= PY, tells us that the reduction in the money supply ads to a proportionate reduction in the nominal value of output PY. For any given price level, the amount of output is lower, and for any given amount of output, the price level is lower. As in Figure 9-3(a), the aggregate demand curve relating P and Y shifts inward fi (a)Inward Shifts in the Aggregate Demand Curve Shifts in the Aggregate Deman Price level. P Curve Changes in the money supply shift the aggregate de- mand curve In panel(a), a de Reductions in the money supply shift outpu PY. For any given price the aggregate demand level P, output Y is lower. Thus a decrease in the money supply shifts the aggregate demand curve inward from AD, to AD2 In panel(b), an increase in the money supply M raises the nomi- nal value of output PY. For any higher. Thus, an increase in the oney supply shifts the agg gate demand curve outward wed,Feb13,200210:084User JOEWA:Job EFF01425:6264_ch09:Pg 244:27136#/eps at 100% *27136* Wed, Feb 13, 2002 10:08 AM For example, consider what happens if the Fed reduces the money supply.The quantity equation, MV = PY, tells us that the reduction in the money supply leads to a proportionate reduction in the nominal value of output PY. For any given price level, the amount of output is lower, and for any given amount of output, the price level is lower.As in Figure 9-3(a), the aggregate demand curve relating P and Y shifts inward. 244 | PART IV Business Cycle Theory: The Economy in the Short Run figure 9-3 Price level, P Income, output, Y (a) Inward Shifts in the Aggregate Demand Curve AD2 AD1 Reductions in the money supply shift the aggregate demand curve to the left. Shifts in the Aggregate Demand Curve Changes in the money supply shift the aggregate de￾mand curve. In panel (a), a de￾crease in the money supply M reduces the nominal value of output PY. For any given price level P, output Y is lower. Thus, a decrease in the money supply shifts the aggregate demand curve inward from AD1 to AD2. In panel (b), an increase in the money supply M raises the nomi￾nal value of output PY. For any given price level P, output Y is higher. Thus, an increase in the money supply shifts the aggre￾gate demand curve outward from AD1 to AD2. Price level, P Income, output, Y (b) Outward Shifts in the Aggregate Demand Curve Increases in the money supply shift the aggregate demand curve to the right. AD1 AD2