Final answer:
An increase in the quantity of money in an economy affects the interest rate, availability of credit, and price levels which are reflected in shifts in the aggregate demand curve. These changes can influence domestic economic variables and trade balances. Calculations using the quantity equation of money can help predict the impact of changes in the money supply on the economy.
Step-by-step explanation:
The increase in the quantity of money in an economy affects other variables, such as the interest rate, the availability of credit, and the price level. These changes are reflected in the aggregate demand (AD) curve, which may shift depending on monetary policy actions. For instance, when the government increases spending, it shifts the AD curve to the right, leading to higher income and price levels. Conversely, a decrease in the money supply would move the AD curve leftward, reducing income and the price level, leading to higher interest rates as banks have less money to lend.
Regarding international financial markets, financial flows are significant in explaining trade imbalances. For example, the United States attracted substantial foreign capital in the late 1990s and early 2000s, resulting in a large trade deficit. The reversal of these flows can significantly affect smaller economies.
When calculating the impact of a monetary stimulus using the quantity equation of money, M x V = P x Q, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced in the economy, we can derive the effect. A central bank estimates that increasing the money supply by $800 billion (from $4 trillion to $4.8 trillion) and increasing the velocity of money to 3, with a predicted rise in the price level from 100 to 110, will result in changes in the economy's total output.