Question

4. The text notes that a 10% increase in the money supply may not increase the price level by 10% in the short run. Explain why.

5. Suppose the Central bank were required to conduct monetary policy so as to hold the unemployment rate below 4%. What implications would this have for the economy?

Answer 1

Answer (4):-

• Increase in the money supply may not increase the price level in case of short run because, there is no affect on the economy in short when the economy shows a lagging due to it's delayed.
• Whenever there will be changes occur in the money supply, it does not effect on the in the economy.
• When the money supply increases, the interest rate will decrease on the other hand, a decrease in money supply will increase the rate of Intrest in short run.

Answer 5-

Unemployment Rates :- It may be defined as the percentage of workers which have capability to do work but still they are jobless or unemployed or still looking for a job.

There are basically three types of unemployment ; Frictional unemployment, cyclical unemployment and structural unemployment.
Monetary Policy :-

• It may be defined as the regulation of money supply to set up the suitable Intrest rates,
• It also controls the inflation rates as well as the deflation
• It regulates the economy and money cost.
• Monetary Policy in a simple language, we can say that it a type of goal to maximize the employment.

Implications for the Economy:-

• To hold the unemployment rate below 4% so that the central bank can easily conduct the monetary policy, they would have to apply following steps for the economy.
• They have to minimize the current unemployment rate in the economy.
• To create more employment, they should have to reduce the cost of funds for the corporate, so that more expansion of business take place.
• By reducing the reserve rates, a reduction in the cost of funds can be happened so that for the expansion of business, low cost funds are easily available.