Expert Answer :Why is it possible to change real economic factors

Solved by verified expert :PROBLEM SET 61) Why is it possible to change real economic factors in the short run simply by printing anddistributing more money?Increased money supply will lower the interest rate. lower interest rate increases themore investment in plant and machinery. It increases employment in the short run.Therefoer, by printing more money and distributing it lowers the interest rate andlower interest rate increases investment and employment. As a result,it leads to moreoutput.2) Explain why a stable 5% inflation rate can be preferable to one that averages 4% but variesbetween 1–7% regularly.It is basically argument between stable vs fluctuating inflation. In case of fluctuatinginflation prices changes more frequently than stable inflation. Investors do not getproper price signals so they can invest because fluctuating inflation increases theuncertainty in the economy. This means that investors/businesses do not know whatprice their product will command in the market.Therefore, there will be less investmentin the economy.3) Explain the difference between active and passive monetary policy.Active Monetary Policy is trying to reach specific goals. Some examples might be aspecific inflation rate, unemployment, or money supply. Active means that the centralbank may have to fight (or "steer") market forces to get there. Passive tends to be moreflexible responding to market forces. I want to explain difference between both of twoby adapting basketball. Active policy is like a coach that says "we want to score 3pointers, so we’re going to do what it takes to get 3s". Howver, Passive policy is "wewant to score points, so take whatever’s open"4) Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and theunemployment rate at 5%. Now assume that the central bank unexpectedly decreases themoney supply by 6%.a. Illustrate the short run effects on the macro-economy by using the aggregate supplyaggregate demand model. Be sure to indicate the direction of change in Real GDP, thePrice Level and the Unemployment Rate. Label all curves and axis for full credit. People will invest less because the central bank unexpectedly decreases the moneysupply by 6. Therefore, AD will fall if investment decreases.5) Suppose the economy is in long-run equilibrium, with real GDP at $16 trillion and theunemployment rate at 5%. Now assume that the central bank increases the money supply by6%.a. Illustrate the short-run effects on the macro-economy by using the aggregate supplyaggregate demand model. Be sure to indicate the direction of change in Real GDP, thePrice Level, and the Unemployment Rate. Label all curves and axis for full credit.It is exactly opposite of the previous question. Higher money supply will lower theinterest rate. Lower interest rate will increase investment and AD. This means thatthe price level and GDP will increase but unemployment rate will decrease.