An economy begins in long-run equilibrium, and than a change in government regul

Question

An economy begins in long-run equilibrium, and than a change in government regulations sum of currency and demand deposits, including chequing accounts, so this regulatory change makes holding money more attractive a. How does this change affect the demand for money? b. What happens to the velocity of money? c. If the central bank keeps the money supply constant, what will happen to output and prices in the short run and in the long run? d. If the goal of the central bank is to stabilize the price level, should the bank keep the money supply constant in response to this regulatory change? If not, what should it do? Why? e. If the goal of the central bank is to stabilize out put, how would your answer to part (d) change?

Explanation / Answer

Ans

Demand for money increases

2 Velocity of money falls as holding period rises

3 output and prices will fall in longrun but remain same in longrun

4 No because prices would fall. To keep prices constant money supply should rise so that people expend more money on goods and services and thus price level returns to normal

5 There will be no change. Prices and output here move in same direction.

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