Question

suppose that rising productivity increases potential output in each period by 4%. what kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

Answer 1

Monetary policy would be needed to maintain a zero rate of inflation at full employment that it should increase money supply by 4% per period.

What is Monetary policy ?

Monetary policy is the strategy used by a country's monetary authority to regulate the money supply or the interest rate paid on very short-term borrowing (the borrowing done by banks to meet their short-term needs), frequently in an effort to lower inflation or the interest rate, in order to ensure price stability and public confidence in the value and stability of the country's currency.

When a monetary authority utilizes its processes to boost the economy, this is known as an expansionary policy. An expansionary strategy keeps short-term interest rates lower than usual or boosts the amount of money available to the economy at a faster rate than usual. By lowering interest rates, it is customarily employed to try to reduce unemployment during a recession in the hopes that less costly credit will encourage firms to borrow more money and therefore grow.

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