6. Monetary policy in the long runConsider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100.Suppose that the central bank in this economy is expanding the money supply by 4% each year. In order for the price level to be maintained at 100,real GDP must grow at an annual rate ofif the velocity of money remains constant.Suppose the central bank enacts an unanticipated expansionary monetary policy. As a result, the supply of loanable funds, leading toa v in short-term interest rates.The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant.Adjust the graph to show the long-run effect of an unanticipated expansionary monetary policy on the goods and services market by dragging theaggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or both.(?The Market for Goods and ServicesOASADASADREAL GDPPRICE LEVEL Adjust the graph to show the long-run effect of an unanticipated expansionary monetary policy on the goods and services market by dragging theaggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or both.The Market for Goods and ServicesOASADASADREAL GDPAn expansionary monetary policy when the economy is at full employment leads to av in real GDP andv in the price level.aTrue or False: In the long run, an expansionary monetary policy will cause real interest rates to fallI.O TrueO FalsePRICE LEVEL

Monetary Policy is a macroeconomic stabilization policy that is used by the central bank of a…

6. Monetary policy in the long run Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100. Suppose that the central bank in this economy is expanding the money supply by 4% each year. In order for the price level to be maintained at 100, real GDP must grow at an annual rate of % if the velocity of money remains constant. Suppose the central bank enacts an unanticipated expansionary monetary policy. As a result, the supply of loanable funds , leading to in short-term interest rates. The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant.

6. Monetary policy in the long run Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100. Suppose that the central bank in this economy is expanding the money supply by 4% each year. In order for the price level to be maintained at 100, real GDP must grow at an annual rate of % if the velocity of money remains constant. Suppose the central bank enacts an unanticipated expansionary monetary policy. As a result, the supply of loanable funds , leading to in short-term interest rates. The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant.

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter15: Monetary Theory And Policy

Section: Chapter Questions

Problem 2.5P

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Question

6. Monetary policy in the long run
Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price level of 100.
Suppose that the central bank in this economy is expanding the money supply by 4% each year. In order for the price level to be maintained at 100,
real GDP must grow at an annual rate of
if the velocity of money remains constant.
Suppose the central bank enacts an unanticipated expansionary monetary policy. As a result, the supply of loanable funds
, leading to
a v in short-term interest rates.
The following graph shows the goods and services market of this economy at full employment. Assume that potential output remains constant.
Adjust the graph to show the long-run effect of an unanticipated expansionary monetary policy on the goods and services market by dragging the
aggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or both.
(?
The Market for Goods and Services
O
AS
AD
AS
AD
REAL GDP
PRICE LEVEL

Adjust the graph to show the long-run effect of an unanticipated expansionary monetary policy on the goods and services market by dragging the
aggregate demand (AD) curve, the short-run aggregate supply (AS) curve, or both.
The Market for Goods and Services
O
AS
AD
AS
AD
REAL GDP
An expansionary monetary policy when the economy is at full employment leads to a
v in real GDP and
v in the price level.
a
True or False: In the long run, an expansionary monetary policy will cause real interest rates to fallI.
O True
O False
PRICE LEVEL

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