lectur4-page36

lectur4-page36 - normal levels since they were already...

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If 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; decreasing the money supply may have the following affects: 1. An increase in short-term interest rates in the short run 2 A decrease in consumption due to lower discretionary incomes and more 2. A decrease in consumption due to lower discretionary incomes and more expensive credit 3. An increase in inventories due to the dampening of consumption relative to production in the short run 4. Managers respond by decreasing production to bring inventories back to their
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Unformatted text preview: normal levels since they were already producing at or near capacity. 5. In the long-run, interest rates will remain fairly stable unless the economy is thrown into a recession. Then prices may begin to fall resulting in some deflation and lower long-term interest rates in the long run. Decreasing the money supply to increase interest rates in the short run would be rational if the economy were to begin over heating with real growth rates in excess 36 of 2.5% to 3.5%, and signs of ensuing inflation. The higher interest rates would be used to cool the economy down....
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