problemset6smontgomery.pdf - ECON 214 PROBLEM SET 6 1 Why...

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ECON 214 PROBLEM SET 6 1) Why is it possible to change real economic factors in the short run simply by printing and distributing more money? By the money supply increasing the real GDP increases. This will put more money to consumers and increase consumption. The real output amounts \viii increase in the short run as more funds are distributed into the economy. 2) Explain why a stable 5% inflation rate can be preferable to one that averages 4% but varies between 1-7% regularly. If inflation stays stable at 5% then businesses can sufficiently conf(mn to the costs of inflation. If inflation becomes unpredictable the adjustmnets made to conform to the costs of inflation could be higher or lower than true levels of inflation. 3) Explain the difference between active and passive monetary policy. Active monetary policy includes stragegic use of monetary policy to cancel out macroeconomic expansions and contractions. Passive monetary policy appear when central banks freely choose to only stabilize money and price levels through monetary policy.
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