ECON103 Lecture 4: Chapter 18 Monetary Policy

• School: University of Delaware
• Department: Economics
• Course: ECON103
• Professor: Yu Gu

Document Summary

Some prices are inflexible and do not adjust. For example, wages and other resource prices are often set by contract and don"t change immediately. A small business owner is deciding whether to open a second location. The central bank decides to expand the money supply. Business owner decides to take out the loan. Raises the price level as flexible prices increase. Real employment and real output expand as a result of simply increasing the money supply w. Not all prices adjust in the short run. Eventually the real value of money will be lower. Monetary policy does not affect real gdp or. Monetary policy does not affect real gdp or unemployment. The only effect will be on the price level, a nominal variable w. Central bank takes action to reduce the money supply. Often done during times of rapid expansion in order to curb potential inflation.