Monetary policy affects which of the following variables in the ...

[DelorasTo]

Monetary policy affects which of the following variables in the long run?
 
  A) the level of output
  B) the rate of unemployment
  C) the rate of inflation
  D) the real interest rate
  E) all of the above

Question 2

Suppose the central bank increases the rate of growth of the money supply. What effect will this increase in money growth have on seignorage in: (1 ) the short run; and (2 ) the medium run? Explain.
 
  What will be an ideal response?

[emily12345]

Answer to Question 1

C

Answer to Question 2

Seignorage equals the rate of growth of H times real money balances. In the short run, the increase in money growth will likely cause an increase in seignorage as long as H/P does not change or does not fall significantly. H/P is a function of real income and the nominal interest rate. In the short run, Y will rise and i will likely fall so H/P will increase. In the medium run, Y will not change. The increased money growth will cause an increase in inflation and an increase in the nominal interest rate causing H/P to fall. Therefore, the effects of an increase in money growth on seignorage are ambiguous.