An expansionary monetary policy raises nominal income but never raises real income.True or false? Explain.

Question

Quizplus · Accepted Answer

The Answer is This is a false statement.An expansionary monetary policy definitely can increase nominal income.Its effect on real income,however,depends on how the price level responds.The general rule is: %Δreal income = %

\Delta

nominal income - %

\Delta

price level.If the %

\Delta

nominal income is greater than the %

\Delta

price level as a result of an expansionary monetary policy,real income will rise.Expansionary monetary policy will generally lead to a rise in real income when the economy is below full employment.

An Expansionary Monetary Policy Raises Nominal Income but Never Raises