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An increase in the money supply effects for short run and long run on intereste rate and output?
Wiki User
∙ 14y ago
To best understand this it is advisable to familiarise yourself with the AA-DD framework.
In the short run, an increase in the money supply will push the interest rate down as money demand fluctuations alter people's desire for liquid assets and thus the prices and rates of return on bonds.
In an open economy where interest parity between countries must be preserved the exchange rate will increase (currency depreciation) in order to create the expectation that it will fall faster in the future. This increase in the exchange rate makes domestic goods more attractive, thus increasing both foreign and domestic demand for domestically produced goods. This then encourages output growth.
In the long run it will depend on whether the money supply increase is deemed to be permanent or temporary. Unless the change is permanent effects in the long run will not be felt. If the change IS permanent, the following will happen:
- As money supply increases, the short run effects described above will mean that output is pushed above its natural level.
- However, as output is above its natural level, this means that workers and machines are working overtime (AA curve shifts right)
- This increases firms costs as workers demand higher wages, machines need more maintenance etc...
- As costs increase, so do prices
- With prices increasing, aggregate demand is pressured downwards (DD curve shifts left)
- As prices increase in the long run, the real money supply is also reduced over time (AA curve shifts back left)
- As long as the AA and DD curves do not intersect at the equilibrium level of output (natural level) then price changes will push them that way.
It is interesting to note the behaviour of the exchange rate here. In the short run it increases due to an increase in the money supply, but then it decreases in the long run as the real money supply is reduced by price increases over time. However it will not go back to its original level. It will be higher by the same percentage as the money supply has been increased by.
I hope this answers your question!
T
Wiki User
∙ 14y ago
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What is competitive supply?
There is competitive supply,if an increase in the output of one commodity requires a reduction in the output of another commodity.
Effects of supply and demand?
supply and demand effects the market economy and commodity prices. with a increase in demand commodity price increases resulting in inflation in economy and viceversa, and with increase in supply by producers there is decrease in commodity price resulting in deflation in economy.
What happens to the aggregate supply curve as the price level increases?
Firms have more of an incentive to increase output
What will happen to the equilibrium price level and real GDP if aggregate demand and aggregate supply both decreases?
AD INCREASES AS DECREASES As the AD/AS model exhibits (exactly the same as Demand and Supply model except Price Level instead of Price and output or real GDP instead of quantity) an increase in AD leads to an inrease in both price level and output. Imagine if there is an increase in demand for tomatoes. According to demand and supply the price of tomatoes will increase. Expand this on a macro scale. When the Aggregate demand for goods and services increase, this pushes the price up. Also in response to this increase in demand, producers will produce more of the good to take advantage of the increased demand, leading to an increase in real GDP. If AS decreases, goods become more scarce and as long as demand is fixed, the price will increase. 'WE PAY MORE MONEY FOR RARE THINGS'. Furthermore, because there is less supply output will decrease. Putting these effects together, both will lead to an increase in price level. The effect on output depends on which force is larger.
Why does the supply curve have a positive slope?
To answer why the supply curve has a positive slope, we must understand the nature of supply and what the curve represents.The supply curve indicates that for the market to increase its output (Q), prices must increase (P). Why? The market supply curve is the collection of the firms' supply curves. Firms face rising marginal costs of production due to diminishing marginal returns to capital and labour (MPL, MPK decrease as L and K increase). That is, the second derivatives of Q(L) and Q(K) are negative. This means that if firms face increased demand and need to produce more output, they will face increasing costs as they produce this greater output. As a result, the price that they must receive to produce this output increases, in order to continue to receive a zero profit in a perfectly-competitive market.The explanation provided below describes the supply curve.The supply curve has a positive slope because of the relationship between a price change and quantity supplied. The Law of Supply tells us that as prices increase quantity supplied will increase as well and vise versa. The relationship between price and quantity supplied is positive or direct.
What is competitive supply?
There is competitive supply,if an increase in the output of one commodity requires a reduction in the output of another commodity.
According to aggregate supply curve what happens as the price level increases?
firms have more of an incentive to increase output
Effects of supply and demand?
supply and demand effects the market economy and commodity prices. with a increase in demand commodity price increases resulting in inflation in economy and viceversa, and with increase in supply by producers there is decrease in commodity price resulting in deflation in economy.
What is supply and temperature independent biasing?
The signal or output of a circuit is often affected by changes in the supply voltage and/or ambient temperature. A biasing circuit is designed to consistently output a selected voltage (or current). Depending on the circuit topology, a change in supply voltage or temperature can cause the intended value to drift. In an increase in temperature can, for example, increase resistances in a circuit. Such effects are usually undesireable and thus a supply/temperature independent bias would be needed. Electronic component manufactures will frequently provide tolerances for outputs relative to changes in supply voltage and temperature.
What happens to the aggregate supply curve as the price level increases?
Firms have more of an incentive to increase output
What will happen to the equilibrium price level and real GDP if aggregate demand and aggregate supply both decreases?
AD INCREASES AS DECREASES As the AD/AS model exhibits (exactly the same as Demand and Supply model except Price Level instead of Price and output or real GDP instead of quantity) an increase in AD leads to an inrease in both price level and output. Imagine if there is an increase in demand for tomatoes. According to demand and supply the price of tomatoes will increase. Expand this on a macro scale. When the Aggregate demand for goods and services increase, this pushes the price up. Also in response to this increase in demand, producers will produce more of the good to take advantage of the increased demand, leading to an increase in real GDP. If AS decreases, goods become more scarce and as long as demand is fixed, the price will increase. 'WE PAY MORE MONEY FOR RARE THINGS'. Furthermore, because there is less supply output will decrease. Putting these effects together, both will lead to an increase in price level. The effect on output depends on which force is larger.
What most likely effects the Fed lowering the discount rate on overnight loans?
An increase in the money supply
Why does the supply curve have a positive slope?
To answer why the supply curve has a positive slope, we must understand the nature of supply and what the curve represents.The supply curve indicates that for the market to increase its output (Q), prices must increase (P). Why? The market supply curve is the collection of the firms' supply curves. Firms face rising marginal costs of production due to diminishing marginal returns to capital and labour (MPL, MPK decrease as L and K increase). That is, the second derivatives of Q(L) and Q(K) are negative. This means that if firms face increased demand and need to produce more output, they will face increasing costs as they produce this greater output. As a result, the price that they must receive to produce this output increases, in order to continue to receive a zero profit in a perfectly-competitive market.The explanation provided below describes the supply curve.The supply curve has a positive slope because of the relationship between a price change and quantity supplied. The Law of Supply tells us that as prices increase quantity supplied will increase as well and vise versa. The relationship between price and quantity supplied is positive or direct.
What is Increase Supply?
Increase Supply means to have more of a specific supply on hand.
What happens when OPEC the production of oil?
If OPEC reduced output, then world supply will fall. Thus, as supply falls, the price will rise, and the profits of oil-producing countries increase. (In a demand-and-supply graph, the supply curve will shift to the left and you'll see the change in price.)
An increase in the money supply effects for short run and long run on interest rate and output?
To best understand this it is advisable to familiarise yourself with the AA-DD framework. In the short run, an increase in the money supply will push the interest rate down as money demand fluctuations alter people's desire for liquid assets and thus the prices and rates of return on bonds. In an open economy where interest parity between countries must be preserved the exchange rate will increase (currency depreciation) in order to create the expectation that it will fall faster in the future. This increase in the exchange rate makes domestic goods more attractive, thus increasing both foreign and domestic demand for domestically produced goods. This then encourages output growth. In the long run it will depend on whether the money supply increase is deemed to be permanent or temporary. Unless the change is permanent effects in the long run will not be felt. If the change IS permanent, the following will happen: - As money supply increases, the short run effects described above will mean that output is pushed above its natural level. - However, as output is above its natural level, this means that workers and machines are working overtime (AA curve shifts right) - This increases firms costs as workers demand higher wages, machines need more maintenance etc... - As costs increase, so do prices - With prices increasing, aggregate demand is pressured downwards (DD curve shifts left) - As prices increase in the long run, the real money supply is also reduced over time (AA curve shifts back left) - As long as the AA and DD curves do not intersect at the equilibrium level of output (natural level) then price changes will push them that way. It is interesting to note the behaviour of the exchange rate here. In the short run it increases due to an increase in the money supply, but then it decreases in the long run as the real money supply is reduced by price increases over time. However it will not go back to its original level. It will be higher by the same percentage as the money supply has been increased by. I hope this answers your question! T
Power supply units are rated in?
Power supply units are rated based on their output and efficiency. When more equipment is connected, a higher output power supply is needed.
