Money and Banking Homework #6
Money Supply in the Short Run and the Long Run
1. Using a graph similar to the one shown in figure 4 on page 623 of the text, show what happens to the price level if instead of letting the economy return to long-run equilibrium on its own, the Fed increases the money supply.
2. Suppose that because the central bank of a certain economy has been increasing the money supply by 10% each year for a long time, that people expect prices to rise 10%. Suppose further that in an attempt to end inflation the central bank makes no increase in the money supply. As result of people expecting prices to rise by 10% but the Fed leaving the money supply the same, what happens to the price level and output in the short run? What happens to unemployment?
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SUBJECTS / CATEGORIES:
1. Business Economics 2. Economics 3. Macroeconomics
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