Question

i. Suppose the government of a country wants to achieve long run growth and they are thinking they can do this by printing money. Is this an effective policy for growth? ii. In country BETA, full-employment level of real GDP is increasing at a rate of 6% per period and the money supply is growing at a 8% rate. What will be the long-run inflation rate in this country, assuming constant velocity

Answer 1

( I ). No, this is not an effective policy for growth.

Printing money by the government would result in an increase in money supply, leading to higher output and employment in the short - run.

However, in the long run, as price increase is realized by people and workers, they would demand higher wages to compensate for higher price level. A demand for higher wages would result in a decrease in employment and output , and the economy would fall back to the equilibrium level achieved before with artificially higher prices due to an increase in quantity of its supply.

The long - run inflation would be equal to increase in money supply that is not accompanied with an increase in real GDP growth.

Therefore, long run inflation would be equal to ( 8 - 6 ) = 2 percent.