The classical model suggests that any increase in the money supply will lead to an increase in aggregate demand and a corresponding increase in the price level.
In this case, the money supply is increased, shifting aggregate demand from AD1 to AD2. This shift in aggregate demand leads to a corresponding increase in the price level from P1 to P3.
Aggregate demand is an economic term that refers to the total demand for all goods and services in an economy. It is typically represented by a graph that measures the total amount of spending in an economy at all levels of price. Aggregate demand is determined by the sum of consumer spending, investment, government spending, and net exports.
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