In a two- to three-page paper (not including title and references pages), answer the question “How does monetary policy affect the macroeconomy?” In your answer, include the following:
- Explain the fundamentals behind why changes in the money supply have real effects on the economy and the monetary transmission mechanism.
- Explain how monetary policy can be used to effectively stabilize output and smooth business cycles.
- Evaluate the role of monetary policy and how it affects the macroeconomy given the implications of the financial accelerator.
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