Question

What would happen in the short-run and long-run to C, I, G, NX, AD, AS, P, Q, inflation and economic growth if the Federal Reserve Bank increased the money supply? Make sure to include the 4 tools for how they would increase the money supply and how this would impact 1) interest rates (include a money graph) and 2) inflation and output (using the AD/AS graph.)

Answer 1

Answer - If the federal reserve will increase the money supply , it will decrease the reserve requirements , purchase the securities from the open market , reduce the discount rates and federal funds rate. This will make the lending easier and cheaper because of more money available in the economy. As a result of this , C , I , NX will increase leading to the rightward shift in AD curve. This will lead to rise in the price level and real GDP in economy creating the inflationary gap in economy. The LM curve will shift right as a result of increase in supply supply and hence the interest rates will fall in economy.

Both the effects can be shown as follows -