1. A) What are the short and long run effects of the Federal Reserve steadily increasing...

1.

A) What are the short and long run effects of the Federal Reserve steadily increasing the money supply? How do we know when it is time to stop increasing the money supply and switch to another alternative?

B) What are short and long run effects of the Federal Reserve steadily decreasing the money supply? How do we know when it is time to stop decreasing the money supply and switch to another alternative?

Expert Solution

1) Due to increase in money supply there will be more investment spending which inturn makes the intrest rates fall thus making consumer spending more. In the short run due to this policy there will be growth in GDP but in long there will be no effect as these policy. Aggregate demand as have a increase and the nominal wages increases.The agrregrate price level and the aggregrate ouput also increases in the short run. In long run there will raise in aggregrate price level but the output will not have any change

2) In decrease in money supply there will decrease in investment spending thus raise intrest rates and inturn there will be reduction in consumer spending.

The aggregrate price level and the aggregrate output decreases in the short run.Thus the nomainal wages fall and the economic growth see a decline.

In long run there will decrease in aggregrate price level but the output will not have any change and the GDP also

Rahul Sunny answered 2 years ago

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