General Education

4 Money Supply Effects on Interest Rates

4 Money Supply Effects on Interest Rates

 

Respond to the following four questions in a minimum of 175 words each question

 

1. Explain what happens to the interest rate if the money supply increases or decreases and the money demand remains unchanged. (175 words)

2. Explain what happens to the interest rate if the money demand increases or decreases and the money supply remains unchanged. (175 words)

if the Federal Reserve chooses to fight high unemployment with expansionary monetary policy and firms and consumers expect this policy to increase inflation, which most likely would cause an upward shift of the short-run Phillips curve. Expansionary monetary policy increases the inflation rate. With adaptive expectations, workers and firms will underestimate inflation, resulting in a decrease in the real wage and a decrease in the unemployment rate. 

3. Why is the credibility of the Fed's policy announcements particularly important? (175 words)

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