An Economy Is Initially in Long-Run Equilibrium

question 13

Essay

An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces the demand for money in the economy.
a. What is the short-run impact on prices and output of the new system?
b. What can the central bank do, if anything, to counteract the short-run changes in output and prices?
c. If the central bank does not take any policy actions, what will be the long-run impact of the electronic payments system on prices and output?

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Definitions:

Proportion

An element or piece assessed regarding its comparison with the total sum.

Equilibrium

A state in which supply and demand are balanced, commonly used in economics to describe the condition where market supply equals market demand.

Payoff

The return or reward received from an investment or action, often analyzed in game theory and economics.

Proportion

A portion, fraction, or quantity that is seen in contrast to the entire entity.