Answer to Question #256282 in Macroeconomics for Hansi

Question

After a change in government as business confidence was restored, private investment begins to rise and becomes highly sensitive to changes in interest rate. Analyze the economic impact of this change. If this change is accompanied by a monetary expansion, then how does your answer change?

Answer 1

Money is neutral because in the long run, the nominal money supply has no influence on production or interest rates. The corresponding increase in the price level is totally represented in the growth in the nominal money supply. When the economy's production falls below its normal level, monetary policy can help it return to that level faster. As an illustration of monetary policy's ability to pull the economy out of recession and back to its normal level of production, consider the following.