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lectur4-page34 - unemployed workers to increase production...

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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 weak with economic growth less than the sustainable level (~2.5% GDP), relatively high unemployment, and production below capacity; increasing the money supply will stimulate the economy with the following possible 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 expensive credit 3. A reduction in inventories due to the stimulation of consumption relative to production in the short run 4. Since production has been below capacity, managers may respond by calling back
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Unformatted text preview: unemployed workers to increase production and bring inventories back to their unemployed workers to increase production and bring inventories back to their normal levels. 5. The economy is returned to reasonable health with stable interest rates and prices. During the of recession of 1990-91, the Fed began increasing the money supply and lowering interest rates to stimulate the economy. At first, not much happened. Why do you think lower interest rates did not help the economy very much in the shor 34 do you think lower interest rates did not help the economy very much in the short-run during this historical time period?...
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This note was uploaded on 12/29/2011 for the course ECO 210 taught by Professor Malls during the Fall '10 term at SUNY Stony Brook.

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