Answered: Money Supply Suppose an economy is in…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Money Supply

Suppose an economy is in long-run equilibrium. The central bank reduces the money supply by 5 percent.

Use your diagram to show what happens to output and the price level as the economy moves from the initial to the new short-run equilibrium.

Now adjust the graph to show the new long-run equilibrium.

What causes the economy to move from its short-run equilibrium to its long-run equilibrium?

1. The government increases spending to increase aggregate demand.

2. The government increases taxes to curb aggregate demand.

3. Nominal wages, prices, and perceptions adjust upward to this new price level.

4. Nominal wages, prices, and perceptions adjust downward to this new price level.

Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the decrease in the money supply? Check all that apply.

1. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run equilibrium.

2. Nominal wages at the initial equilibrium are less than nominal wages at the new long-run equilibrium.

3. Real wages at the initial equilibrium are equal to real wages at the new short-run equilibrium.

4. Real wages at the initial equilibrium are equal to real wages at the new long-run equilibrium.

Judging by the impact of the money supply on nominal and real wages, this analysis (IS or IS NOT) consistent with the proposition that money has real effects in the short run but is neutral in the long run.

Expert Solution

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“Since you have asked multiple questions, we will solve the first question for you. If you want any specific question to be solved, then please specify the question number or post only that question.”

A short-run equilibrium condition is when the total amount of quantity demanded in an economy is equal to the total amount of quantity supplied in the economy.

A long-run equilibrium condition in an economy prevails when the LRAS curve, the SRAS curve, and the AD intersects each other or are equal.

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