Answer to Question #312250 in Macroeconomics for Sima

Question

QUESTION TWO

a) Suppose that the central bank acts to increase the money supply.

i. In the aggregate demand/aggregate supply diagram, will this monetary policy action work

initially to shift the aggregate demand curve, the short-‐run aggregate supply curve, or the long-‐

run aggregate supply curve? (Note: focusing for now on just the short-‐run effects of the change

in policy, only one of these curves will shift.)

ii. In which direction will the curve you mentioned above shift: to the left or to the right?

iii. When the curve you mentioned above shifts, what will the short-‐run effect on the

economywide level of prices be: with it rise, fall, or stay the same?

iv. When the curve you mentioned above shifts, what will the short-‐run effect on real GDP be:

will it rise, fall, or stay the same?

v. When the curve you mentioned above shifts, what will the short-‐run effect on unemployment

be: will it rise, fall, or stay the same?

Answer 1

i) Increasing money supply will mean that people will have enough money thus leading to increased their purchasing power. This will automatically lead to the shift of the demand curve to the right in the long-run.

ii)The curve will shift to the right.

iii)In the short-run, the prices of commodities will automatically increase.

iv)In the short-run, the real GDP will remain the same because the GDP is affected over a given period of time.

v)In the short-run, the unemployment rate will fall. This is because there's enough money circulating thus paying workers will not be the problem.