Chapter 16, Problem 1FCT

To determine

If the public’s desired money balances were to increase and the Fed were to allow the quantity of money in circulation to rise, how would such a Fed policy response influence the short run equilibrium price level and level of real GDP per year?

Introduction:

Money balances depends upon the strategy that the central bank or the government initiates in order to increase or decrease the money supply. Increasing money supply results in lowering the interest rate which in turn increases the level of real GDP but decreases the interest income and vice versa.