I couldn't understand the logic behind the increase in nominal income without changing the money supply, which I confronted with when I was studying financial markets on the relationship between money and interest rate which is:

$Ms=Md$ (In equilibrium condition)

$Md=Y*L(i) (-) $

enter image description here

How can a country increase its nominal income without money supply? Because If the marginal propensity to consume is 1, which means all disposable income will be spent by consumers (if we consider some of the least developed countries), therefore the demand curve for money would not shift because there wouldn't be any increase in nominal income except by increase in money supply due to all income is spent on consumption.

  • $\begingroup$ the graph does look like its plots increase in nominal income, would you care to clarify what you mean? Y is real income not nominal income $\endgroup$
    – 1muflon1
    Commented Mar 26, 2023 at 19:26
  • $\begingroup$ In the page 92 of book Macroeconomics written by Olivier Blanchard it says "For a given money supply, an increase in nominal income leads to an increase in the interest rate. The reason: At the initial interest rate, the demand for money exceeds the supply. The increase in the intererst rate decreases the amount of money people want to hold and reestablishes equilibrium." Did I get wrong? $\endgroup$ Commented Mar 26, 2023 at 19:31
  • $\begingroup$ okay that clarifies it $\endgroup$
    – 1muflon1
    Commented Mar 26, 2023 at 20:58

1 Answer 1

  1. Marginal propensity to consume is not necessary equal to 1. Also even if it would be one it is not a limiting factor of nominal GDP.
  2. Nominal income is not limited by money supply because a single dollar bill can settle multiple transactions.
  • $\begingroup$ For the first one, yes it is not a limiting factor that mpc is equal to 1. But I am trying to implicate that if mpc is 1 then all income will be spent which means the saving rate is 0. How can it possible that nominal income increase while all the money in market is spent? For second one, the multiple transaction phenomena is valid for also incomes, for ones income will be another's income as the all of the income is spent to consumption. $\endgroup$ Commented Mar 26, 2023 at 21:48
  • 1
    $\begingroup$ @tunay59 for example, I buy ice cream with 10e, shopkeeper then buys chocolate bar with the same 10e bill, 20e of GDP was generated with one 10e bill. $\endgroup$
    – 1muflon1
    Commented Mar 26, 2023 at 22:08
  • $\begingroup$ So it is the velocity of circulation of money that increases nominal income $\endgroup$ Commented Mar 27, 2023 at 8:23
  • $\begingroup$ @tunay59 that is what allows it, there isnt causal relationship there, people spend more money so as byproduct velocity happens to increase as well $\endgroup$
    – 1muflon1
    Commented Mar 27, 2023 at 9:16

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