Question

Take a look at the panel (b) of Figure 10-6. If the Federal Reserve seeks to prevent secular deflation from taking place as a consequence of economic growth, how should it change the quantity of money in circulation? How would this policy action prevent secular deflation?

Short answer

An expansionary financial strategy of the Federal Reserve can forestall the common collapse resulting in the monetary development in the country.

Step-by-step solution

introduction

Any adjustment of the condition of creative innovation and the amount/nature of component inputs causes the LRAS bend to move to one side.

explanation

This infers that expanded ability or efficiency permits the economy to deliver labour and products at a more elevated level. As the AD stays unaltered, in the event that the cost level doesn't fall, there will be an overabundance of an unsold load of labour and products in the economy over the long haul. This is shown by EA in the diagram beneath.