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
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Chapter 15 Solutions
ECON MACRO (with MindTap Printed Access Card) (New, Engaging Titles from 4LTR Press)
- 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_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_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_forward
- 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_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_forwardPlease answer everything in the photos including the graph.arrow_forward
- What 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_forwardConsider the figure to the right. What change in the position of the aggregate demand curve could generate deflation that is, a decrease in the equilibrium price level? What type of variation in the quantity of money placed into circulation by the Bank of Canada could generate such a change in the position of the aggregate demand (AD) curve? A fall in the equilibrium price level could be caused by Canada could generate such a change in the position of the aggregate demand (AD) curve by the quantity of money placed into circulation. in aggregate demand. The Bank of 1.) Using the line drawing tool, draw a new AD curve that shows the effects of decreasing the quantity of money in circulation. Label your line "AD2." 2.) Using the point drawing tool, indicate the economy's new long-run equilibrium price and level of real GDP. Label this point "E₂. Carefully follow the instructions above, and draw only the required objects. Price Level LRAS₁ E₁ Real GDP per Year ($ trillions) AD₁arrow_forwardExplain it using the grapharrow_forward
- Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning