Question

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The size of the labor force The inflation rate The quantity of physical capital The price level Suppose the economy produces real GDP of $50 billion when unemployment is at its natural rate.

Answer 1

Answer: Therefore an increase in money growth will increase only the price level and inflation rate

Step-by-step explanation:

(a) The concept of money neutrality tells that the change in money supply leads to changes only in nominal's variables such as price level, wages and inflation but have no impact on real variables e.g. production. Therefore an increase in money growth will increase only the price level and inflation rate

(b) The unemployment rate is at its natural level and the real GDP is $50 billion, since the unemployment rate is at is natural level the output must be at the natural level too. Therefore the current real GDP must be the long run real GDP.

(c) An increase in the minimium wage will cause the natural rate of unemployment to increase and that will lead to a fall in the natural level of output. Therefore an increase in the minimum wage will shift the long run aggregate supply curve to the left.