Suppose That Equilibrium in the Money Market Is Described by the Equation

Essay

Suppose that equilibrium in the money market is described by the equation M = aP/r, where M is the money supply, P is the price level, r is the interest rate and a is a constant.Suppose that investment is described by the equation I = b - kr, where b and k are constants.Using the equation Y = C + I + G (where Y is GDP, C is consumption and G is government spending), show that a higher price level leads to lower GDP.