Question

Using simple equations, explain how an expansionary monetary policy by the central bank that did not translate into an improvement in aggregate output can trigger higher inflation in the economy.

(Answers should be accurate, insightful, thorough, and clearly expressed. They should also demonstrate strong command of key ideas, theories, research findings, and policy debates)

Answer 1

1) Expansionary monetary policy increases money supply in the economy.

2) It leads to an increase in optimal output and Gross domestic Product (GDP).

3) If the money supply is increased, it leads to an increase in consumer spending which in turn shifts the aggregate demand curve to the right.

4) Expansionary monetary policy can be implemented through government bonds, discount window lending and by decreasing the reserve requirement of the customers.

5) Expansionary monetary policy could lead to higher economic growth and lower unemployment which may create inflation in the economy.

6) If the interest rates will be cut done, it does not necessarily means that the economy is recovering.

7)