I hope my money and banking students can answer the following:
Select one of the methods we discussed on how expansionary monetary policy increases GDP (there were five in total, from lecture 19) in the short run. Detail the logic (i.e. the series of causation) of why this avenue of monetary expansion increases GDP. Why won’t this work in the long run? At what point in the causation does the method you selected stop working? Why?
Saturday, May 10, 2008
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well I believe that the a fall in the real interest rate is one of the five causes. This is so, because prices are sticky so there is a lag on how changes in prices reflects a change in the money supply I believe. If the money supply increases very fast, the lag will not last. However if the Money Supply increases gradually, the lag could last for months or even years. Bearing in mind that a fall in the real interest rate encourages investment, affects consumption and increases GDP. I hope this answers the question lool
i meant to say that there is a lag on how long it takes prices to change thus reflecting a change in the money supply...
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