Monetary Policy – Principles of Macroeconomics Homework

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Monetary Policy, Inflation, Real GDP, Principles of Macroeconomics Homework

The key words in this Macroeconomics course include Monetary Policy, Inflation, Aggregate Demand, Aggregate Supply, Real GDP, Recession, Long Run


Which of the following limits the impact of monetary policy?

recession is a result of depressed aggregate demand rather than aggregate supply.

aggregate supply changes always lead to lower real GDP.

people adjust their expectations of inflation.

money is neutral in the short run.

Explanation: Monetary policy only affects aggregate demand, so if there is a change in aggregate supply, monetary policy will be of little help to restore an economy.
In the long run, there are ways to mitigate the impact of monetary policy. Thus, in the long run we say money is neutral; monetary policy doesn’t change real variables. Given enough time, people adjust their expectations so that changing the money supply through monetary policy doesn’t lower or raise real GDP or unemployment.


Which of the following statements is true? (assuming expected inflation is built into contracts)

lenders of loanable funds will benefit when inflations is greater than expected

borrowers of loanable funds benefit when inflation is less than expected

suppliers of labor and other inputs are hurt when inflation is greater than expected

purchasers of labor and other inputs benefit when inflation is less than expected

Explanation: Purchasers of labor and other inputs, along with borrowers of loanable funds are hurt when inflation is less than anticipated, because they end up paying more in real terms than they intended to. Lenders of loanable funds and suppliers of labor and other inputs are hurt when inflation is greater than anticipated because the real value of what they are selling or getting paid back is less than they thought it was going to be.


Which of the following variables are affected by monetary policy in the long run?

real GDP

the tax rate

price level

employment

Explanation: After monetary policy is implemented, and the aggregate demand curve shifts and a new price level prevails. In the short run, a firm may not be able to adjust to this new level of prices for their inputs, but given time, firms alter their production levels consistent with the new prices. This causes the short-run aggregate supply curve to shift. The SRAS curve will shift in the opposite direction resulting in a return to the long run equilibrium level of output and employment. 


With adaptive expectations, what is the inevitable consequence of an active, expansionary monetary policy in the short and long run?

higher unemployment in the short run, lower inflation in the long run

higher unemployment in the short run, higher inflation in the long run

lower unemployment in the short run, lower inflation in the long run

lower unemployment in the short run, higher inflation in the long run

Explanation: Adaptive expectations rely on past inflation to form future expectations of inflation. In the short run, you can surprise people with higher-than-expected inflation, which leads to temporary decreases in unemployment.
      In the long run, prices adjust. Since money is neutral in the long run, the result is higher inflation.