An economy is initially in equilibrium at the natural level. The central bank increases the money...

An economy is initially in equilibrium at the natural level. The central bank increases the money supply. Graphically illustrate and explain short-run monetary nonneutrality and long-run monetary neutrality using the AD–AS model.

Expert Solution

Rahul Sunny answered 8 months ago

Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money...

Suppose the economy is initially at a long-run equilibrium. Then the central bank increases the money supply. Assuming any resulting inﬂation is unexpected, explain any changes in GDP, unemployment, and inﬂation in the short-run that are caused by the monetary expansion. Explain your conclusions using three diagrams: (i) one for the IS-LM model, (ii) one for the AD-AS model, and (iii) one for the Phillips curve.

16. Suppose the central bank increases the money supply in order to increase the equilibrium level...

16. Suppose the central bank increases the money supply in order to increase the equilibrium level of GDP. Which of the following conditions would lead to a large increase in GDP given the increase in the money supply? A. A small marginal propensity to consume B. A very steep investment schedule C. A very steep money demand schedule D. All of the above conditions

Assume that the economy is initially at the natural level of output. A permanent increase in...

Assume that the economy is initially at the natural level of output. A permanent increase in taxes will cause which of the following? Question 7 options: a decrease in the aggregate price level, and no change in output in the medium run a reduction in unemployment in the short run a reduction in output and no change in the aggregate price level in the short run no change in investment in the medium run more than one of the above...

If the central bank increases the money supply, then the nominal interest rate will ____ and...

If the central bank increases the money supply, then the nominal interest rate will ____ and the exchange rate will ____. A rise; appreciate B rise; depreciate C fall; appreciate D fall; depreciate

If a central bank increases the money supply in response to an adverse supply shock, then...

If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? a. neither output nor the price level b. both the price level and output c. the price level but not output d. output but not the price level

In a modern money economy, the money supply is composed of central bank issued currency and...

In a modern money economy, the money supply is composed of central bank issued currency and certain privately issued bank deposits that are convertible into currency on demand and can be transferred as payments electronically or by check. Thus, the stock of money is composed of both central bank notes (currency) and private bank debts (transaction or checkable deposits). There exists another class of government issued debts that are promises to pay fixed amounts of money at a specified time(s)...

In a closed economy, the supply of money may be controlled by the Central Bank in...

In a closed economy, the supply of money may be controlled by the Central Bank in three ways: Reserve requirements , Open market operations, Discount rates. Outline each of the three ways.

1-In the short run, when the central bank increases the quantity of money, the A)demand for...

1-In the short run, when the central bank increases the quantity of money, the A)demand for money decreases. B)price level decreases. C)demand for money increases. D)nominal interest rate falls. E)quantity demanded of money decreases 2-If the quantity of money supplied ________ the quantity demanded, in the long run the value of money ________. a)exceeds; falls as people spend their surplus money b)exceeds; rises as people buy bonds c)is less than; falls as people spend their surplus money d)is less than;...

2. Assume the economy is initially in a short-run equilibrium at a level of output below...

2. Assume the economy is initially in a short-run equilibrium at a level of output below the natural rate. a. Use the IS-LM model to graphically illustrate: i) how the economy will adjust in the long-run if the no-policy action is taken. ii) the long-run equilibrium if fiscal policy is used to return the economy to the natural rate of output. b. Explain how investment, the interest rate, and the price level differ in the new long-run equilibrium in the...

If the central bank increases money supply, what will happen to product/service price in general and...

If the central bank increases money supply, what will happen to product/service price in general and interests in general? The mechanism of how the change in money supply influences prices and interest rates should be clearly explained.

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