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Question

Problem Set 6Why is it possible to change real economic factors in the short run simply by printing and

distributing more money? Explain why a stable 5% inflation rate can be preferable to one that averages 4% but varies between 1–7% regularly.

  • Explain the difference between active and passive monetary policy.

Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and the unemployment rate at 5%. Now assume that the central bank unexpectedly decreases the money supply by 6%.

  • Illustrate the short run effects on the macro-economy by using the aggregate supply-aggregate demand model. Be sure to indicate the direction of change in Real GDP, the Price Level and the Unemployment Rate. Label all curves and axis for full credit.
 
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