How does a change in the quantity of money change the interest rate in the long run?
What will be an ideal response?
In the long run a change in the quantity of money does not change the interest rate. For example, suppose the Federal Reserve increases the quantity of money (the effects from a decrease in the quantity of money are the reverse of an increase). In the short run the nominal interest rate and the real interest rate fall. Both households and firms increase their demand for goods. The resulting shortages force prices higher and therefore the price level rises. As the price level rises, the quantity of real money decreases, which raises the nominal interest rate and real interest rate. The rise in the interest rate decreases the demand for goods. Eventually the price level rises so that the quantity of real money equals the initial amount. At this point, the nominal interest rate and real interest rate have risen to equal their initial values so there is no long-run effect on the interest rate from a change in the quantity of money.
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Which of the following would not be considered an automatic stabilizer?
A) rising corporate income tax revenues due to an expanding economy B) increasing food stamp payments due to more people becoming unemployed during a recession C) legislation increasing funding for job retraining passed during a recession D) decreasing unemployment insurance payments due to increased employment during an expansion
A price ceiling means that:
A. there is currently a surplus of the relevant product. B. government is imposing a legal price that is typically below the equilibrium price. C. government wants to stop a deflationary spiral. D. government is imposing a legal price that is typically above the equilibrium price.