Connections

How do they connect? The changes in the Money Market tend to immediately affect the economy through changes in aggregate demand, while changes in the Loanable Funds Market affect both aggregate demand & supply and can have longer-term effects by influencing investment and capital accumulation.

As shown in the graph below, the short-run AS rises exponentially with the aggregate output (Y*). This is a reaction to the decrease in aggregate demand (AD and New AD), meaning that the price level increases as a reaction.

Source: Wikipedia