An economy begins in the long run equilibrium, and credit card companies start offering cash back on every purchase.
This policy change makes holding money less attractive.
a. How does this change affect the demand for money?
b. What happens to the velocity of money?
c. If the Fed keeps the money supply constant, what will happen to output and prices in the short run?
d. If the goal is to stabilize the price level, should the Fed keep the money supply constant in response to this regulatory change? If not, what should it do?