Question

If the Federal Reserve uses expansionary monetary policy, then: a there is a negative short-run effect on real GDP but prices remain unchanged in the long run. b there is a positive short-run effect on the price level but the aggregate price level remains unchanged in the long run. c there is a positive short-run effect on real GDP but GDP remains equal to potential GDP in the long run. d there is a negative short-run effect on the price level but the aggregate price level remains unchanged in the long run. e there is a positive long-run effect on real GDP but GDP remains unchanged at its potential level in the short run.

Answer 1

b

Step-by-step explanation:

There are two types of monetary policy :

Expansionary monetary policy : these are polices taken in order to increase money supply. When money supply increases, aggregate demand increases. reducing interest rate and open market purchase are ways of carrying out expansionary monetary policy

Contractionary monetary policy : these are policies taken to reduce money supply. When money supply decreases, aggregate demand falls. Increasing interest rate and open market sales are ways of carrying out contractionary monetary policy

Goals of monetary policy include

• financial market stability

• economic growth

• high employment

• price stability

When an expansionary monetary policy is carried out, the supply of money increases in the short run. thus price level increases

In the long run, due to the money neutrality argument, there is no effect