Problem Set

1) Why is it possible to change real economic factors in the short run simply by printing and distributing more money?- When the money supply increase, the real GDP increases. More money goes to the consumer and will increase consumption. The amount of real output will increase in short run as more money are being distributed

2) Explain why a stable 5% inflation rate can be preferable to one that averages 4% but varies between 1-7% regularly.- If inflation is stable at 5% business can successufully adapted to the cost of inflation. If inflation is unpredictable, the adaption to the cost of inflation might be higher or lower than the true level of inflation.

3) Explain the difference between active and passive monetary policy.- Active monetary policy involves the strategic use of monetary policy to counteract macroeconomic expansions and contractions. Passive monetary policy occurs when central banks purposefully choose to only stabilize money and price levels through monetary policy(does not seek to use inflation.)

4) 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%.

a. 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.

5) 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 increases the money supply by 6%.

a. 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.