There’s a change in Federal Reserve policy regarding the growth of the money supply. What if the markets do not believe in the policy?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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There’s a change in Federal Reserve policy regarding the growth of the money supply. What if the markets do not believe in the policy?
Step 1
Plot the graphs.
The corresponding table includes a breakdown including Inflation Rate, Unemployment Rate,
Price Level, and Real GDP. Using the data below, plot the graphs:
Plot the short-run Phillips curve and the aggregate supply curve on separate graphs.
Plot the long-run Phillips curve on a separate graph, when the natural unemployment
rate is 6%.
Inflation Rate
Unemployment Rate
Price Level
Real GD
2%
7%
104
9.8
3%
6%
103
10.0
4%
5%
102
10.2
Transcribed Image Text:Step 1 Plot the graphs. The corresponding table includes a breakdown including Inflation Rate, Unemployment Rate, Price Level, and Real GDP. Using the data below, plot the graphs: Plot the short-run Phillips curve and the aggregate supply curve on separate graphs. Plot the long-run Phillips curve on a separate graph, when the natural unemployment rate is 6%. Inflation Rate Unemployment Rate Price Level Real GD 2% 7% 104 9.8 3% 6% 103 10.0 4% 5% 102 10.2
Expert Solution
Step 1

There’s a change in Federal Reserve policy regarding the growth of the money supply in the economy. Let us assume that the Federal Reserve Policy is to increase money supply so as to increase the money supply in the economy and in turn to increase Aggregate Demand. 

When the markets do not believe in the policy then the people will not be able to form expectations before the policy gets implemented. When the Federal Reserve uses expansionary monetary policy to increase money supply and aggregate demand in the economy. when the policy comes into existence , the policy does it's work and the equilibrium prices increases with the increase in the employment in the economy. In the short run , the people do not understand that their real wages have fallen due to the increase in the prices. But as soon as they come to know , they realise and start forming expectations and due to which they bargain for higher money wages causing the aggregate supply to fall down and the price level in the economy to rise where the short run Aggregate supply , long run aggregate supply and the aggregate demand curve intersects. This results in rise in prices and the fall in employment. 

 

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