Question

An economy is initially at potential output, in the long run, expansionary monetary policy is expected:

a) not to affect output in the long run

b) not to affect output in either the short run or the long run

c) to affect output, but only in the long run

d) to affect output in both the short run and the long run

Which of the following monetary policies likely decreases aggregate demand and, in the short run, output?

a) A cut in the federal funds rate

b) An open market sale of government securities

c) A cut in the discount rate

d) A cut in the reserve requirement

Answer 1

a) "A"

An expansionary policy will not affect the output in the long run but only in the short run, in the long run it will result in a price increase only. the answer is "A".

b) "B"

A open market sales of the government securities will shift the aggregate demand to the left and decrease it.