If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment...

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in __________.

Group of answer choices

the long run and the short run

the long run but not the short run

the short run but not the long run

neither the short run nor the long run

Solutions

Expert Solution

If the Federal Reserve decreases the rate at which it increases the money supply there will be be decline in in the rate of growth of nominal GDP or the rate at which nominal GDP Increases in the short run. Thus, there will be unemployment. In the short run there is a Negative impact of a decrease in the rate at which Federal Reserve increases the money supply, on both prices and real GDP. Thus, Unemployment would Decrease. But in the long run only the prices will be affected. There will not be any effect on the rate of growth of real GDP and will not be any effect on Unemployment in the long run.

Therefore, if the Federal Reserve decreases the rate at which it increases the money supply then unemployment is higher in short run but not in the long run because in the long run impact of Federal Reserve action would be on the rate of growth of price level only.

Hence third option is correct i.e, the short run but not the long run.

Rahul Sunny answered 1 month ago

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