Final answer:
An adverse supply shock shifts the FE line left, an increase in labor supply shifts it right, and an increase in money supply does not directly affect the FE line but can influence it over time. A rise in loans supply increases the quantity of loans made and received. An increasing money supply rate by the Federal Reserve can boost GDP and reduce unemployment initially but may lead to higher inflation.
Step-by-step explanation:
The question pertains to the effect of different scenarios on the FE (Full Employment) line in economics, which represents the combination of output and unemployment where the economy’s labor market is in equilibrium. Additionally, it inquires about the outcome of changes in the financial market and the macroeconomic impact of an increasing money supply by the Federal Reserve.
Effects on the FE Line
An adverse supply shock generally shifts the FE line to the left because it decreases the economy’s productive capacity, raising prices and potentially increasing unemployment if the labor market does not adjust quickly.
An increase in the labor supply would typically shift the FE line to the right, suggesting more people are available for work, potentially increasing the economy’s output if these workers find employment.
An increase in the money supply does not directly affect the FE line itself, but can influence factors that might shift the FE line in the longer term through changes in aggregate demand and economic conditions.
Changes in the Financial Market
A rise in supply of loans in the financial market leads to an increase in the quantity of loans made and received, holding demand constant, because more capital is available for borrowers.
Impact of Increasing Money Supply
If the Federal Reserve begins to increase the supply of money at an increasing rate, it could initially lead to a boost in GDP due to higher spending. In the short term, unemployment might decrease as businesses expand. However, if this policy persists, it might lead to higher inflation, especially if the growth in money supply outpaces real output growth.