Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The quantity of physical capital The level of technological knowledge The size of the labor force The inflation rate

The size of labor force

The inflation rate

The level of technological knowledge

Explanation:

In the long run the economy's real Gross Domestic Product depends on labor force, capital, natural resources and technological knowledge. The level of physical quantity is not affected by the money supply in the long run. This will have affects in short run only. In the long run only nominal prices are impacted and production or physical quantity has no impacts.

All the above will change with the increase of money supply by the government in any market.

Explanation:

Usually, government will up the supply of money in the market to help the economy and decelerate recession.

When it usually, does this through the Central Bank by increasing the reserves of the commercial banks and dropping interbank interest rate.

This, among other monetary policy measures, increases lending by the commercial banks to real sector businesses.

Then A (Increased Capital) is achieved.

As the process continues, businesses take advantage of the relatively cheap funds to expand their operations by investing the funds. As they expand their operations

C) - Expansion of labor is achieved.

In some cases, the expansion causes the importation or adoption of newer technology especially in the manufacturing sector. Technology is one sure way to cut costs, increase efficiency and effectiveness. Companies would normally carryout this strategy to gain advantage in the market.

So you find that:

B) Technical Knowledge is also achieved.

When the Federal government wants to carryout an expansionary monetary policy, it also increases it's own level of spending.

Government usually is the largest employer of labour, the largest contractor and by extension the largest supplier of money in the economy.

Increasing money supply therefore leads to increase in effective demand.

Effective demand, according to the laws of economics, always causes supply to increase. Before supply responds, price changes first by going in the exact direction of Demand. When this happens,

D) Price Inflation is created

Cheers!

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