Question

Expansionary monetary policy brings about prosperity in the medium run." Do you agree?

Answer 1

Expansionary Monetary policy, in the short run, lowers the interest rate, increases output and increases price levels leading to inflation. But with time, in the medium run, the output goes back to its initial stage. The monetary policy has no effect on the output level of a country. The increase in the level of money is reflected in the rise in price level only. So at constant output and higher price, the GDP of the country increases. This is a measure of prosperity of a country. So with expansionary monetary policy, even though there is no change in output levels, but due to rise in price levels, there is an increase in GDP in the medium run and as a result there is prosperity in the medium run.

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