Show the short and long run effects of a monetary expansion (M t) in this sit- uation in the AD/AS model. You may omit the labor market and production function graphs and you should assume sticky prices for the SRAS. As you can see from above (hint), in the long run output is unchanged but the price level is higher. What do you think would happens if the central banks tries this strategy over and over again? Now assume that these repeated inereases in the money supply have caused expected inflation (7) to increase. Furthermore, assume the central bank stops its repeated increases of the money supply at the same time (assume M is constant). What is the effect of the inerease in inflation expectations on output, the real interest rate, and the price level in the short run?
Show the short and long run effects of a monetary expansion (M t) in this sit- uation in the AD/AS model. You may omit the labor market and production function graphs and you should assume sticky prices for the SRAS. As you can see from above (hint), in the long run output is unchanged but the price level is higher. What do you think would happens if the central banks tries this strategy over and over again? Now assume that these repeated inereases in the money supply have caused expected inflation (7) to increase. Furthermore, assume the central bank stops its repeated increases of the money supply at the same time (assume M is constant). What is the effect of the inerease in inflation expectations on output, the real interest rate, and the price level in the short run?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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