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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Identify the changes in the price level and Real GDP in both the short run and the long run as a result of the Fed’s increasing the money supply. Assume that the Fed’s action is incorrectly anticipated (by being biased upward), that wages and prices are flexible, and that individuals hold rational expectations.

To determine

Changes in the real GDP and price level in the short run and long run when the policy is incorrectly anticipated.

Explanation

Suppose Fed’s action for a policy is incorrectly anticipated, then the individuals will mistakenly believe that the change in aggregate demand is more than the actual change...

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