He Fed increased the supply of US dollars at an average rate of 6 percent per year over the 1980-2005 period. Based on the theor

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2 months ago

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He Fed increased the supply of US dollars at an average rate of 6 percent per year over the 1980-2005 period. Based on the theor

y of production capacity, if the Fed had instead increased the money supply at the rate of 7 percent per year during that period, given other policies.
A. The average inflation rate during 1980-2005 would have been one percentage point higher than it actually was in that period.B. The economy would have enjoyed a much higher level of output in the mid-2000s.C. The price level in 2005 would have been about 28 percent higher than what it actually reached in that year.D. The output of the economy in the mid-2000s would not have been very different from the levels it actually reached.

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2 answers:

Free_Kalibri [3.7K] · Answer 1 · 2026-03-12T01:09:33+03:00

Answer:

B. In the mid-2000s, the economy would have experienced a significantly higher output level.

Explanation:

This selection derives from the production capacity theory, suggesting that a rise in production resources correlates with increased industrial capacity among companies. Capital is a critical resource of production that grows alongside an increase in US dollar supply. An augmented money supply enhances the lending capacity of banks to businesses, thereby boosting their production capabilities.

If the reasoning were based on inflation theory, the outcome would differ. Inflation theory indicates that the average inflation rate ascends proportionately with an increase in the money supply, among other contributors to inflation rates.

Speculating that prices in 2005 would have been approximately 28 percent greater than the actual levels that year is quite uncertain. Option D is definitely incorrect because economic output increases as a result of an expanded production capacity stemming from a larger money supply.

Nady [3.6K] · Answer 2 · 2026-03-12T01:10:20+03:00

Answer: A. The average inflation rate during 1980-2005 would have been one percentage point higher than it actually was in that period.

B. The economy would have enjoyed a much higher level of output in the mid-2000s

Explanation:

If the Fed had raised the money supply by 1% more than it did, the average inflation rate would have surpassed what it actually was. This increase can be attributed to the presence of more currency within the economy, allowing individuals to purchase a broader range of goods and services, thus driving prices upward to accommodate this demand.

Moreover, the American economic output would likely have been elevated in the mid-2000s due to the accumulative impact of a higher money supply from preceding years. As demand for goods and services surged, companies would be compelled to enhance their production capacity. With a larger money supply, borrowing costs decrease, facilitating firms' access to loans for expansion and fulfillment of demand, ultimately boosting economic output.