The Federal Reserve expands the money supply by 5 percent.a. Use the theory of liquidity preference to illustrate in a graph theimpact of this policy on the interest rate.b. Use the model of aggregate demand and aggregate supply to illustratethe impact of this change in the interest rate on output and the pricelevel in the short run.c. When the economy makes the transition from its short-runequilibrium to its new long-run equilibrium, what will happen to theprice level?d. How will this change in the price level affect the demand for moneyand the equilibrium interest rate?e. Is this analysis consistent with the proposition that money has realeffects in the short run but is neutral in the long run?
The Federal Reserve expands the money supply by 5 percent.
a. Use the theory of liquidity preference to illustrate in a graph the
impact of this policy on the interest rate.
b. Use the model of aggregate demand and
the impact of this change in the interest rate on output and the
level in the short run.
c. When the economy makes the transition from its short-run
equilibrium to its new long-run equilibrium, what will happen to the
price level?
d. How will this change in the price level affect the demand for money
and the equilibrium interest rate?
e. Is this analysis consistent with the proposition that money has real
effects in the short run but is neutral in the long run?
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