Question
Asked May 4, 2019
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if the FED mailed everyone a brand new $100 bill, what would happen to prices, income and output in the short run? (Hint: AD&AS Model) And, in the long run? (Hint: Equation of Exchange).

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Expert Answer

Step 1

Money supply is the total stock of money in the economy at a point of time. It is controlled by Federal Reserve, the central bank of United States.

Step 2

If Fed mailed everyone a $100 brand new bill, it would mean that Fed releases money into the economy. The effects of an increase in money supply in short run and long run are as follows.

Step 3

Short run:

An increase in money supply leads to a fall in interest rate. This leads to increase in private investment expenditure and resulting increase in aggregate demand. As a result, prices, output and income increase. The diagrammatic representation of the same is given below.

AD0: Initia...

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