How does monetary policy affect equilibrium GDP?
A. Monetary policy affect equilibrium GDP in a short-run but has no effect in a long-run due to money neutrality. Making money cheaper and thus more available for investments helps fight recession and support AD from falling back, but cheaper money (increase in money-supply and consequently reducing interest rates) devalues money creating inflationary pressure. B. (a) increase in MS will reduce interest rate. (b) increase in the equilibrium level of national income will increase interest rates. (c) decrease in money supply will increase interest rate (d) leftward shift of asset demand for money will reduce interest rate.
