Answer to Question #127297 in Macroeconomics for marwan khan

Question

Suppose that when everyone wakes up tomorrow, they discover that the
government has given them an additional amount of money equal to the amount
they already had. Explain what effect this doubling of the money supply will
likely have on the following:
a. The total amount spent on goods and services
b. The quantity of goods and services purchased if prices are sticky
c. The prices of goods and services if prices can adjust

Answer 1

a- The total amount spent on goods and services would increase as the personal disposable income to everyone will double.

 

b-

Prices are "sticky" means

they adjust slowly. This stickiness, they suggest, means that changes

in the money supply have an impact on the real economy, prompting changes in

investment, employment, output, and consumption. Policymakers can exploit this

effect. Still, the quantity of goods and services will increase.

 

c-

If the prices can adjust as per demand then, the price will rise as demand is

more, and with the increased price, the quantity demanded will fall.