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Monetary Expansion Detail


In 2008, the US economy fell into a major recession. In response to the recession the monetary authority (The Federal Open Market Committee – FOMC) significantly increased the money supply.

In a Keynesian model where only a fraction of firms in the economy have fixed prices, we would expect inventories to temporarily

, money demand to

, and real money balances to

in the short run as a result of the monetary expansion.