MODULE 32
Money, Output, and Prices in the Long Run
In this Module, you will learn to:
• Identify the effects of an inappropriate monetary policy
• Explain the concept of monetary neutrality and its relationship to the long-
In the previous module we discussed how expansionary and contractionary monetary policy can be used to stabilize the economy. The Federal Reserve can use its monetary policy tools to change the money supply and cause the equilibrium interest rate in the money market to increase or decrease. But what if a central bank pursues a monetary policy that is not appropriate? That is, what if a central bank pursues expansionary policy during an expansion or contractionary policy during a recession? In this module we consider how a counterproductive action by a central bank can actually destabilize the economy in the short run. We also introduce the long-