After the Federal Reserve increases the growth rate of the money supply, what is the new total spending growth rate?
1. Now think about the point that the economy ends up at that is the new long run equilibrium.
Use the following information for the next 10 questions. You should draw a graph that depicts the situation below and use your picture to answer the questions. Assume that wages and prices are sticky and that we start at a long run equilibrium. Assume that at this initial point, the growth rate of the money supply is 6%, the growth rate of the velocity of money is 5% and that the real economic growth rate is 4%. Assume that there is a drop in consumption and investment such that causes total spending growth to drop by 5%. Assume now that the Federal Reserve is going to try and counter this drop in consumption and investment through monetary policy, and that they increase the growth rate of the money supply by 9%.
2. What is the value of expected inflation for the SRAS curve before the Federal Reserve increases the growth rate of the money supply?
3. After Federal Reserve action, what is the growth rate of the velocity of money?