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The change in the money supply affects economic agents

Economics Dec 08, 2020

The change in the money supply affects economic agents. Suppose the Federal Reserve increases the money supply to boost aggregate demand during recessionary pressure.

a. How does the increase in the money supply affect consumer spending and investment?

b. How does it affect the firm or organization you work for?

c. How do the Federal Reserve policies affect us as individuals (households)?

Expert Solution

a.

An increase in the money supply is given to consumers in the form of an increase in wages. The increased income boosts the consumption level and investment level. As per aggregate demand and supply models, the consumption and investment increase with rising price level or money supply. Economic income increases.

b.

On the microeconomic level, an increase in the money supply in long would see an increase in nominal wages. If the organization is performing well, investors in the firm will increase and thus the company's profits will increase.

c.

Federal Reserve policies on the individual level, affect in the form of increased inflation, increase in wages, increased personal consumption. The individual borrowers will find borrowing profitable with low-interest rates during the inflationary situation. But, the monetary policy influences are on an aggregate level, the micro-level involves certain small time lag in showing the effect.

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