Supply Of The Pound

Question 1

Explain diagram

Answer 1

Exchange rate on left, quantity on bottom, demand and supply normal, S shifts right

Question 2

How does money supply rise

Answer 2

Central bank prints money

Inflow of funds from abroad, Bank of England has to buy the surplus on foreign exchange to build up from reserves. pounds can be used by foreigners to buy UK exports depositing banks and create credit, positive multiplier effect increase in money supply . Only occurs in Bank of England attempts to maintain an exchange rate below equilibrium

Question 3

Explain diagram for affect of money supply

Answer 3

On one axes his price level and on the other is real GDP. AS is vertical, AD is normal and shifts right, income stays the same and price rises

Question 4

Explain effect of Increased supply of the pound

Answer 4

Leads to an increase in normal output it causes an increase in consumer spending, this will shift the aggregate demand curve to the right, this cause inflation