5. Critical analysis Q5 Suppose the economy is currently in long-run, full-employment equilibrium. Assume that expected...

5. Critical analysis Q5

Suppose the economy is currently in long-run, full-employment equilibrium. Assume that expected inflation is 0% in the short run.

An unanticipated decrease in the money supply in the United States will ________ (increase, decrease, not affect) employment in the short run.

A sustained decrease in the money supply in the United States will ________ (increase, not affect, decrease) real output in the long run.

Expert Solution

a. Decrease. Here the expected inflation is 0 in short run, thus the fall in money supply in the economy will decrease the employment rate in short run. The falling money supply will increase the interest rate and this will negatively affect the investment rate. Thus the economy will move downward. The current inflation will increase with low level of production. The falling investment will increase the unemployment rate.

b. Not affect. The falling money supply will not change the real output. The fall in money supply make a leftward shift of the aggregate supply curve, but the aggregate demand curve remains the same. So the falling money supply will not change the level of output. This will reduce the price level in the economy and retards the production level. This lowering production will decline the demand for labour, because of the low level of investment. The falling money supply will not make any change in output and production level.

Rahul Sunny answered 1 year ago

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