Expansionary Monetrary Policy and Interest Rate Q

Unanticipated expansionary monetary policy results in which of the following in the short run? a. An increase in real GDP and the level of unemployment. b. A decline in both nominal and real interest rates. c. An increase in nominal interest rates and no change to real interest rates. d. A decrease in the general price level. Hint from me: Nominal interest rate = Real interest rate + inflation rate


Exactly what I thought, but … Stall does not agree!


Jusify please.

expansionary monetary policy -> smaller nominal rates since inflation doesn’t decrease -> smaller real rates

Yes, inflation does not decrease, but it most certainly rises. So how do you justify B?

real rate = nominal rate - inflation nominal rate decreases, inflation increases -> real rate decreases

This is true if the drop in nominal rates is larger (on a percetage basis) than the rise in inflation rate, but we have no reason to believe that.

Sorry, I think you are right. Accept my apologies, I was thinking of something completely off.

no worries. good luck on your studies!

dreary - great handle…! I would have thought only an economist would use a handle like that!

I thought b too. My reasoning is that more money in the economy, money is easier to get so the price declines.

More explanation: MS shifts to right. So, MD and MS intersect at a lower level. Nominal interest rate decreases. AD shifts to right. AD and AS intersect at a higher level. So, price level (inflation) increases. Real int rate=Nominal int. rate-inflation Real interest rate also decreases.