When the money supply curve shifts from MS1 to MS2, Select one: a. None of the above is correct. b. the equilibrium price level decreases. c. the economy's ability to produce goods and services increases. d. the demand for goods and services decreases.

When the money supply curve is MS1, the equilibrium price of money (interest rate is the price of money) is equal to 1/P₁. When the money supply curve shifts to the right to MS2, then the equilibrium price is 1/P₂. Rightward shifts of the supply curves always increase the quantity supplied at all the price levels, therefore they cause the equilibrium price to lower.

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ladeitan ladeitan · Answer 2 · 2020-03-11T01:58:50+01:00

Answer: The correct answer is b. the equilibrium price level decreases.

Explanation: Equilibrium in the money market comes about only when the demand for money equals to the available supply. The equation which states that money supply equals money demand is called the LM curve, standing for liquidity and money. The supply of money is a stock at a particular point in time, which literally means 'money supply'.

There are three alternative definitions of money supply but let's discuss one, which was given by Professor Friedman. He defines the money supply as "literally the number of dollars people are carrying around in their pockets, the number of dollars they have to their credit at banks or dollars they have to their credit at banks in the form of demand deposits, and also commercial bank time deposits."

Based on the above, if the money supply shifts from MS1 to MS2 (increases), all things being equal, it therefore means the equilibrium price level will decrease.