Answer to Question #210088 in Macroeconomics for Samia

Question

Beginning from the initial classical equilibrium suppose that the central bank increases the money supply by 420 while price remains fixed as it's initial long run equilibrium level. What will be the impact of this policy on all endogenous variables in short run and long run

Answer 1

In the short run since the price remain fixed, the central bank might simultaneously engage in expansionary monetary policy to lower the interest rate to the initial rates while in the long-run price will fall over time, and the economy returns to its normal interest rates