An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces...

An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces the demand for money in the economy.

a. In the short run, output will (choose: increase or decrease) as the reduction in money demand (increase in velocity) shifts the (choose: aggregate supply or aggregate demand) curve out to the (choose: left or right). Price will (choose: fall, not change, rise) in the short run.

b. The central bank could counteract by (choose: increasing, reducing, not changing) the money supply, shifting the (choose: aggregate supply, aggregate demand) curve back to the (choose: right, left)

c. In the long run, with no central bank stabilizing action, output will return to the full-employment level with a (choose: lower, higher) price level

Expert Solution

a. increase; aggregate demand; right; rise
(Decrease in miney demand decrease interest rate which increases investment which shifts AD to the right. So, output and price level increase.)

b. decreasing; aggregate demand; left
(Central bank can decrease the money supply which will decrease AD.)

c. higher
(Increase in AD will lead to more than full employment level of output which increases cost of production which decreases AS. So, price level will rise.)

Rahul Sunny answered 2 years ago

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