Question

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to________

Answer 1

Answer:

The correct answer is increase the money supply.

Explanation:

The increase in the money supply (print more banknotes and coin coins) has a direct effect on inflation that usually leads to it rising.

When the money supply is increased, the nominal value of the money remains unchanged but not the real value of the money, since in the face of the increase in prices, less goods and services are acquired with the same money. It is what is known as loss of the purchasing power of money.

Under this assumption, so that the increase in the money supply has no effect on inflation, that increase must correspond to the increase in the supply of goods and services, or what is the same, the printing of money must obey a specific need originated in the increase of production and economic dynamism, and not as a decision without real bases that leads to increase the amount of money circulating artificially with the aim of increasing consumption via indebtedness, since the final destination of that additional money and "imaginary" is to place it on the market by granting credits, since there is no new offer of goods and services, it cannot be exchanged for them.