Supposed there is an increase in the velocity of money caused by the increased use of ATM machines. (20 points) a. How would prices and output be affected in the short run? b. If the Federal Reserve’s objective is to keep prices stable in the short-run, how should it respond? c. In the long run, what will happen to prices and output? If the Federal Reserve’s objective is to keep prices stable in the long run, how should it respond? When should it undertake its response — immediately or once the “long run” is reached? d. Based upon your answer in part (c), how would you respond to those who argue that the Federal Reserve should wait until inflation appears before reacting?
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