Final answer:
An ECB increase affects various economic factors like aggregate demand and international trade, with effects not strictly time-dependent as monetary policy unfolds through complex mechanisms influencing different economic junctures. In terms of monetary stimulus, an $800 billion increase in the ECB's money supply with a stable velocity of money suggests a higher output and potential inflation.
Step-by-step explanation:
An increase in European Central Bank (ECB) policies can impact a variety of economic factors such as aggregate demand, international trade, and the banking system. This impact is seen over time as monetary policy changes typically have long and variable lags. However, the association between an ECB increase and these effects is not strictly time-dependent because the actions of a central bank unfold through a series of complex mechanisms, ultimately influencing the economy at different junctures.
To detail the Effects of Monetary Stimulus, let's consider the quantity equation of money (MV = PQ), where M is the money supply, V is the velocity of money, P is the price level, and Q is the output (quantity of goods and services). If the ECB decides to stimulate the economy by increasing the money supply by $800 billion and the estimated velocity is 3 with a price level rising from 100 to 110, we calculate the impact on Q. Given the initial money supply (M) is $4 trillion, the increased money supply would be $4.8 trillion (M + $800 billion). Applying the quantity equation, MV = PQ before the stimulus would be $4 trillion x 3 = P x Q. After the increase, it would be $4.8 trillion x 3 = 110 x Q.
The calculation indicates that the increase in the money supply would lead to a proportional increase in Q, assuming V is unchanged. Therefore, for aggregate output to adjust to a higher money supply without changing velocity, output (Q) needs to increase to maintain the equality. This scenario hints at an invigorated economy but also suggests potential inflationary pressures.