An Economy Is Initially in Long-Run Equilibrium

question 47

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-iun impact on prices and output of the new system?
b. What can the central bank do, if anything, to counteract the short-tun 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:

Financial Growth Factors

Components that contribute to the increase in value of financial assets or earnings.

Geometric Mean

The nth root of the product of n numbers, used to calculate the average rate of return over time or the mean of ratios.

Growth Factor

One plus the percentage increase over a period of time. A growth factor less than 1 indicates negative growth, whereas a growth factor greater than 1 indicates positive growth. The growth factor cannot be less than 0.

Average Wage

The mean earnings of workers in a specific job, industry, or region, often used to compare economic wellbeing.