Suppose investment increases and the money supply does not change. Use the model of aggregate demand and aggregate supply to predict the impact of such an increase on nominal GDP. Now what happens in terms of the variables in the equation of exchange?
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By increasing the amount of money in the economy, the central bank encourages private consumption. Increasing the money supply also decreases the interest rate, which encourages lending and investment. The increase in consumption and investment leads to a higher aggregate demand.
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