1. What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy affect these factors in the long run? Explain. An unanticipated increase in the money supply will have a significant negative or positive impact on different areas of the economy. Real interest rate will decrease in the short run when money supply increases. When money demand fluctuates, it alters people’s desire for liquid assets which affects prices and reates of return on bonds. With real interest rates, the short run on real output rises above normal levels when there is an increase in money supply. This also affects employment in the short run by lowering it as output increases.
2. How rapidly has the money supply (M1) grown during the past twelve months? State the rate of growth (use http://www.federalreserve.gov/releases/h6/) and the most recent release, use the seasonally adjusted figures.
Calculate the rate of growth across the year by taking the (new amount of M1- old amount of M1)/old amount of M1). Given the state of the economy, should monetary authorities increase or decrease the growth rate of money? Explain why. The money supply has grown steadily in the past twelve months. The rate from May 2014 to May 2015 was 7.8% under the seasonally adjusted figures. Given the state of the economy, monetary authorizes should increase the growth rate of money because when employment rates increase, inflation decreases.
3. Is stability in the general level of prices through time important? Why or why not? Should price stability be the goal of monetary policy? Explain your responses. Stability in general level of prices through time is important because over time, it helps consumers develop trust in a brand. By establishing trust, consumers are better able to buy and invest in monies. This is why price stability should be the goal of monetary policy.
4. Compare and contrast the impact of an unexpected shift to a more expansionary monetary policy under rational and adaptive expectations. Are the implications of the two theories different in the short run? Are the long-run implications different? Explain.