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what impact will an unanticipated increase in the money supply have in the real interest rate, real output, and employment in the short run? How will expansionary monetary policy effect these factors in the long run? explain.

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Darryn D'Souza
Darryn D'SouzaLv10
30 Sep 2019
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Related questions

Problem Set 5

Complete all questions listed below. Clearly label your answers.

1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain.

2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why.

3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses.

4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.

The rational expectations theory indicates that expansionary policy will:

a. stimulate real output in the long run but not in the short run.
b. fail to increase employment because individuals will anticipate it and take actions that will offset its impact.
c. equalize real and nominal interest rates during lengthy periods of inflation.
d. expand real output and employment if the public quickly anticipates the effects of the expansionary policy.

(Monetary Policy and an Expansionary Gap) Suppose the Fed wishes to use monetary policy to close an expansionary gap.

a. Should the Fed increase or decrease the money supply?

b. If the Fed uses open-market operations, should it buy or sell government securities?

c. 10. Determine whether each of the following increases decreases, or remains unchanged in the short run: the market interest rate, the quantity of money demanded, investment spending, aggregate demand, potential output, the price level, and equilibrium real GDP.

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