Problem Set 5 Essay

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Econ 214 Problem Set 5 1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain. The money supply in an economy is the benchmark by which interest rates are determined. The supply of money is directly tied into the amount of money that can be loaned and borrowed in various capacities. The more money there is to loan, the less “expensive” it is to borrow that money. This is because when there is an increase in the money supply, the demand for that money fluctuates as well. This causes an increase in the overall amount of money being exchanged, and in turn,…show more content…
2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures. Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why. The M1 money supply grew by a rate of 8.86%. This is based on the Jan 2014 M1 supply number of 2,683.0 billion, and Jan 2013 number of 2,464.5 billion. This indicates a healthy growth rate of the economy and the M1 money supply. According to the reports issued by the board of governors of the Federal Reserve, Unemployment is decreasing, and inflation is remaining within their intended constraints. The Fed is currently maintaining policies to keep the growth rate of the M1 money supply in check. If the money supply were to increase at a more rapid rate, than it is likely that inflation would also increase. 3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses. Price stability in an economy is an essential quality for sustained growth. It is one of the key aspects
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