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An increase in the price level shifts the money demand curve to the right, causing various changes in the economy.
An increase in the price level causes the money demand curve to shift to the right. When people want to hold more money at each interest rate due to a change in expectations, preferences, or transactions costs, the money demand curve shifts to the right, leading to a higher interest rate.
Higher interest rates resulting from an increase in the price level will lead to a lower quantity of investment, a higher exchange rate, and a decrease in net exports. This causes the aggregate demand curve to shift to the left, resulting in a decrease in real GDP and the price level.
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