Indicate how changes in monetary policy are transmitted to the goods and services market? Discuss for the case of an expansion in the money supply
When the money supply is expanded, aggregate demand will rise for several reasons. First, the larger money supply will increase the supply of loanable funds, causing real interest rates to fall. The lower real interest rates will cause businesses to expand their investment and consumers to purchase more durable goods. Second, the lower U.S. interest rate will lead to a depreciation in the exchange rate value of the dollar, as investors move their money to foreign countries for a higher rate of return. This will increase U.S. net exports. Third, the lower interest rates will tend to increase the value and prices of assets, such as homes. This will increase consumer wealth and stimulate consumption.
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Which of the following is consistent with the law of demand?
A) People substitute higher-priced goods for higher-quality goods. B) People substitute some higher-priced goods for other higher-priced goods. C) People substitute lower-priced goods for higher-priced goods. D) People substitute some lower-priced goods for other lower-priced goods.
Transaction costs are
A) the costs, such as sales taxes, that are imposed by the government. B) equal to the hourly cost of a lawyer used to write a contract. C) the costs associated with making, reaching, and enforcing agreements. D) not true costs because they relate to time rather than real resources.