Monetary Policy - Money output, and Prices in the long run
3 important questions on Monetary Policy - Money output, and Prices in the long run
When the economy is already at potential output How will an increase in the money supply sift the SRME? In the long run?
When the economy is already at potential output
an increase in the money supply
shifts the AD curve rightward
and the economy moves to a new SRME
over time there will be an increase in nominal wages
in the long, the increase in nominal wages shifts the short-run AS leftward to SRAS
an increase in the money supply
shifts the AD curve rightward
and the economy moves to a new SRME
over time there will be an increase in nominal wages
in the long, the increase in nominal wages shifts the short-run AS leftward to SRAS
What happens to money demand when money supply increases?
The increase in money supply
pushes the interest rate down
the aggregate price ;eve; rises in proportion to the increase in the money supply,
leading to an increase in money demand which increases in proportion to the aggregate price level
so the quantity of money demand changes by the same amount as the quantity supplied
pushes the interest rate down
the aggregate price ;eve; rises in proportion to the increase in the money supply,
leading to an increase in money demand which increases in proportion to the aggregate price level
so the quantity of money demand changes by the same amount as the quantity supplied
What will happen to the long run nominal interest rate? And for what two reasons is this true?
- The long run nominal interest rate is is the original interest rate
- changes in the money supply does not affect the interest rate.
- two reasons
- due to money neutrality in the long run the aggregate price level rises by the same proportion as the money supply
- due to the demand for money being equal to the aggregate price level
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