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If the Fed increases the money supply by 0.5%, will the value of money increase or decrease? Will the price level increase or decrease? Illustrate
If the Fed increases the money supply by 0.5%, will the value of money increase or decrease? Will the price level increase or decrease? Illustrate with a graph. (b) Now suppose the demand for money decreases. Does this result in inflation or deflation? Explain. Suppose that economists observe than an increase in government spending of $6 billion raises total demand for goods and services by $16 billion. (a) If these economists ignore the possibility of crowding out, what would they estimate the marginal propensity to consume (MPC) to be? (b) Now suppose the economists allow for crowding out. Would their new estimate of the MPC be larger or smaller than the initial level? Explain your
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