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The growth in the gross domestic product (GDP = the annual output of goods and services...

The growth in the gross domestic product (GDP = the annual output of goods and services of labor and property of a country) in real terms is usually 2-3% annually for the United States. Suppose the Federal Reserve Board chairman announced that the money supply will be allowed to grow by 6% in the next year. Supposing the real GDP growth is 2.4%, is this announcement good news or bad and why? Be sure to note any assumptions you make to give your response

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Answer #1

In the short term increased money supply will reduce lending rate hence increasing money with consumers. This will result in stimulating demand for goods and services which increase GDP.(assiming money supply won't effect infaltion in teh short term).this will increase investments by industries and also labour demand will rise.

However in the long run increased money supply will have effect on inflation which will further reduce the Real GDP. The FED tries to achieve higher higher growth in GDP while also controlling inflation.

Best of luck . God Bless

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