CFA Practice Question

CFA Practice Question

If the central bank unexpectedly increases money supply when the economy is at the full employment level, ______
A. interest rates will fall, demand will increase and long-run output will increase.
B. interest rates will fall, and demand and long-run supply will increase, resulting in greater output at higher prices.
C. the money supply increase would be inflationary, with higher prices, but no increase in long-run output.
Explanation: The demand curve will shift up to the right, but since the economy is at the full employment level, the supply curve will also shift up to the left. The result would be the same output as before but at higher prices.

User Contributed Comments 7

User Comment
JZino It is my understandind that the impact of expansionary monetary policy is only purely inflationary when the expansion is expected. Why does this answer suggest otherwise?
nike what else do you expect in this scenario? No more output as it's at full exmployment level, and more money injected: inflation.
solnce The problem is that it was done unexpectedly. Read the question. People need time to adjust their expectations and during this time they will have more money to spend. Thus, in the short-term there will surely be expansion.
dealsoutlook yeah what would be the difference b/w expected and unexpected?
cfahitman SR expected: cause inflation and same output
SR unexpected: cause inflation and INCREASE OUTPUT

however, LR unexpected: higher inflation and same output....
mindi basically in the LR output cannot be more than full employment unless there is a shift in technology or some other factor besides price?
achoi0 demand-pull inflation
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