f. Do you think this Fed chairman was a good appointment? 8. Suppose the Fed exp

Question

f. Do you think this Fed chairman was a good appointment? 8. Suppose the Fed expands the money supply, but because the public expects this Fed action, it simul taneously raises its expectation of the price level. What will happen to output and the price level in the short run? Compare this result to the outcome if the Fed expanded the money supply but the public didn't change its expectation of the price level. ts, explain the short- long-run effects on output and the price run and long-run efects on output and the pri run and

Explanation / Answer

8. When the money supply increases in the economy then the interest rates will fall due to increased supply of money in the economy. This decrease in interest rate will demotivate saving and promote consumption and will also increase investment which will addup to increase in aggregate demand. And if public expects to price level rise in future then it will increase its consumption i.e. increasing AD further.

So if there is no price level increase expectation then AD will increase but will be less than increase with expectations.

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