To explain:
Using an AD-AS diagram, the short-run and long-run impacts of an increase in the money supply assuming that the economy is initially in long-run equilibrium:
Concept Introduction:
The Federal Reserve manages the supply of the money and money aggregates in the economy. They increase money supply to stimulate output and employment in the economy. However, an increase in money supply also affects the price level in the economy. The Fed does this through open market purchase of U.S. government securities or by printing money. This increase in money supply results with a decrease in the interest rates. However, such money supply has major effect on the real GDP, the potential output in the economy, and the price levels. One can understand this relationship better with the help of AD-AS (aggregate demand-
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Chapter 15 Solutions
ECON MACRO (with ECON MACRO Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
- The graph below shows the long-run aggregate supply (LRAS), the short-run aggregate supply (SRAS), and aggregate demand (AD) curves for a given economy. Manipulate the curves to show the long run effect of an increase in money supply. In the long run, an increase in the money supply will result in the following.arrow_forwardThe advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their wealth in checking accounts. Use the aggregate demand– aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.arrow_forwardSuppose velocity rises and the money supply falls: How will things change in the AD-AS framework if a change in the money supply is completely offset by a change in velocity? The fall in velocity could shift the AD curve to the right by the same amount as the increase in the money supply shifts the AD curve to the left. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left. A change in the money supply would decrease Real GDP, the short-run price level, and the long-run price level. The fall in velocity would shift the AD curve to the left by the same amount as the increase in the money supply shifts the AD curve to the right.arrow_forward
- Suppose an economist believes that the price level in the economy is directly related to the money supply, or the amount of money circulating in the economy. The economist proposes the following relationship: P=A×MP=A×M • P=Price LevelP=Price Level • M=Money SupplyM=Money Supply • A=A composite of other factors, including real GDP, that change very slowly over time.A=A composite of other factors, including real GDP, that change very slowly over time. How might an economist gather empirical data to test the proposed relationship between money and the price level?arrow_forwardSuppose velocity rises and the money supply falls. How will things change in the AD–AS framework if a change in the money supply is completely offset by a change in velocity? Check all that apply. The increase in velocity could shift the AD curve to the left by the same amount as the fall in the money supply shifts the AD curve to the right. Changes in the money supply would have no effect on Real GDP, the short-run price level, nor the long-run price level. A change in the money supply would decrease Real GDP, the short-run price level, and the long-run price level. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left.arrow_forwardSuppose the economy is originally at an equilibrium output at the potential output level. Now suppose the central bank increases money supply by 15%, while the potential output increases by 4% over the period the long run can be achieved. Using the AD-AS framework and quantity theory of money, explain how the real output level and the price level will change in the short run and in the long run.arrow_forward
- Below is a graphical model of the AS-AD. In this model, the initial level of the economy is at low output and low inflation. Describe what happens to the economy when the BSP decides to lower interest rate and most likely this will lead to an increase in money supply thereafter. Answer the following guide questions. Based on the graph. What happens to the aggregate demand? Describe your answer.arrow_forwardGraphically show and link the long-run equilibrium in goods market and money market, using MD-MS diagram, Investment Expenditure diagram, AE-Y diagram, and AD-AS diagram. a. Clearly explain (using chain reactions) and show the short-run effect of an increase in money supply on the equilibrium of this economy. Make sure you clearly show the impact in all diagrams. b. In the same way, explain and show the long-run effect of the increase in money supply noting that your answer to this question picks up where you finished in part (a) and describes the adjustment process according to the output gap. c. Clearly describe based on your graphs, the long-term neutrality of money. d. Is the composition of Y* any different after the new long-run equilibrium establishes?arrow_forwardE. 2. 4)During a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy. Aggregate price level LRAS SRAS2 SRAS, AD1 Real GDP Recessionary gap a. What would be the appropriate fiscal policy response to this situation if the primary concern of the govern- ment was to maintain economic growth? Illustrate the effect of the policy on the equilibrium point and the aggregate price level using the diagram. b. What would be the appropriate fiscal policy response to this situation if the…arrow_forward
- Show and explain why aggregate demand (AD) curve is negatively sloped by taking the link between the goods market and money market into considerationarrow_forwardDuring a 2008 interview, then German Finance Minister Peer Steinbrueck said, "We have to watch out that in Europe and beyond, nothing like a combination of downward economic [growth] and high inflation rates emerges-something that experts call stagflation." Such a situation can be depicted by the movement of the short-run aggregate supply curve from its original position, SRAS,, to its new position, SRAS2, with the new equilibrium point E2 in the accompanying figure. In this question, we try to understand why stagflation is particularly hard to fix using fiscal policy.arrow_forwardWhat is an impact of a temporary money expansion on the aggregate demand (AD) curve? The AD curve shifts upward. The AD curve shifts downward. The AD curve does not shift and the equilibrium point moves upward along the AD curve. The AD curve does not shift and the equilibrium point moves downward along the AD curvearrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning