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lectur4-page33 - expensive credit 3 A reduction in...

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Using our Consumption-Production model again, we can evaluate the affects of monetary policy on the economy. When the economy is humming along rather nicely with economic growth at or near the sustainable level (~2.5% to 3.5% real GDP), relatively low unemployment, and production at or near capacity; increasing the money supply may have the following affects: 1. A decrease in short-term interest rates in the short run 2. An increase in consumption due to higher discretionary incomes and less
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Unformatted text preview: expensive credit 3. A reduction in inventories due to the stimulation of consumption relative to production in the short run 4. Managers respond by increasing prices to bring inventories back to their normal levels since they are already producing at or near capacity levels since they are already producing at or near capacity. 5. In the long-run, long-term interest rates may start increasing in response to higher inflation. 33...
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