3). In the classical model, what happens to GDP, Prices, Unemployment and economic growth if the...

3). In the classical model, what happens to GDP, Prices, Unemployment and economic growth if the Federal Reserve increases the money supply? Make sure to include the money graph and the good (AD/AS) graph.

Solutions

Expert Solution

When Federal Reserves increases the money supply:

Equally Increases in nominal output,or Gross domestic product(GDP). When money supply increases this will lead to an increase in consumer spending resulting shift in the aggregate demand(AD). AD is the sum of private consumption, investment,government spending and imports.

The value of money reduces,that's why price level increase.

Decreases Unemployment in the economy by lowering interest rates in the hope that easy credit will entice business into expanding.

Increases Economic Growth as central bank purchases governement bonds through open market operation which puts downward pressure on interest rates that promote investment in the economy or by decreasing the reserve requirement or to increase the amonut of discount window lending. Increase in money supply is inflationary in nature.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

If unemployment increases what happens to GDP?

What does the model predict economic growth? What does it predict the level of GDP?

Solow model without ideas accumulation Consider the simple Solow model without ideas accumulation in the long term (steady-state). What does the model predict economic growth? What does it predict the level of GDP?

Tax Policy What would happen to inflation, GDP, unemployment and economic growth in the short run...

Tax Policy What would happen to inflation, GDP, unemployment and economic growth in the short run and the long run if we cut income taxes by 100 billion and the marginal propensity to consume (MPC) is equal to .75? Make sure to include the appropriate equation and an analysis of the impacts of C, I, G, NX, AD, AS, P, Q, inflation and economic growth. How would this tax cut impact the National Budget and the National Debt? What are...

3. What form of unemployment is consistent with the Classical Model? 4. Provide a brief explanation...

3. What form of unemployment is consistent with the Classical Model? 4. Provide a brief explanation of the Quantity Theory of Money. 5. Why is monetary policy ineffective to combat recession in the world of the Classical Model?

Along with GDP growth, the unemployment rate is the most recognized economic statistic in the United...

Along with GDP growth, the unemployment rate is the most recognized economic statistic in the United States. It’s too bad it is so misleading. “The unemployment rate declined to 4.6 percent in November…” are the very first words of the Bureau of Labor Statistics’ news release about the November 2016 survey data. That must seem incredibly wrong to many Americans. And that is because it is, in fact, not true that 4.6% of Americans who want a full-time job don’t...

Classical small open economy model: According to the Classical small open economy model, what happens to...

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...

The dire prediction of economic growth based upon the Classical growth model has not been very...

The dire prediction of economic growth based upon the Classical growth model has not been very accurate. What is this prediction and why hasn't it they come true?

What drives economic growth in the Solow model? What reduces economic growth in the Solow model?

What are the economic effects of COVID-19 pandemic on Saudi Arabia's economy (GDP growth, unemployment, inflation/deflation,...

What are the economic effects of COVID-19 pandemic on Saudi Arabia's economy (GDP growth, unemployment, inflation/deflation, fiscal deficits, net capital outflows etc)?

Now use the bathtub model of unemployment to explain what happens to the unemployment level? Use...

Now use the bathtub model of unemployment to explain what happens to the unemployment level? Use the mathematical relationship to substantiate your answer and explain it in words. [Hint: You need to think whether the job finding rate or job separation rate or both changes in response to widespread workplace closures.]

Subjects