Principles of Economics- Mankiw (5th) 612

Principles of Economics- Mankiw (5th) 612 - 632 PA R T T E...

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632 PART TEN MONEY AND PRICES IN THE LONG RUN THE EFFECTS OF A MONETARY INJECTION Let’s now consider the effects of a change in monetary policy. To do so, imagine that the economy is in equilibrium and then, suddenly, the Fed doubles the supply of money by printing some dollar bills and dropping them around the country from helicopters. (Or, less dramatically and more realistically, the Fed could inject money into the economy by buying some government bonds from the public in open-market operations.) What happens after such a monetary injection? How does the new equilibrium compare to the old one? Figure 28-2 shows what happens. The monetary injection shifts the supply curve to the right from MS 1 to MS 2 , and the equilibrium moves from point A to point B. As a result, the value of money (shown on the left axis) decreases from 1/2 to 1/4, and the equilibrium price level (shown on the right axis) increases from 2 to 4. In other words, when an increase in the money supply makes dollars more
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