Econ Questions..(2) 10points

1. In short run, printing money increases the nominal money supply which has an exapnsionart effect to the economy. But it causes too much money chasing too few goods (a Classical view) since the increase in money circulation is not backed by the increase in employment, which ends up a rise in general price level in the long run. The real income, therefore, is unaffected, and the purchasing power remains. So people are not richer.

2. Philips: Money Illusion
Structural uneployment always exists.
With inflation, the workers regard the change of nominal wages as the change of real wages, and take the lower real wage offer. Unemployment drops. So there is a trade off between inflation and unemployment.

Friedman: Expectation Theory
People expect that the increase in nominal wage is due to inflation only. People are not fooled and remain in job search. So unemployment is settled at natural rate in the long run. So trade off exists. An monetary policy always leads to increase in general price level without any effect on unemployment.

1. I disagree with the statement. When government print money and distribute it equally, the real income is still no change, the only change is inflation exists, and the inflation rate increase rapidly.Since the real income is no change, the living standard will not arise, for example, before print money, people may have $100, and can buy a good in $5. After print money, people have $1000, but the good is not cost $5 this time, it should be $50. As a result, society will not be rich by print money.

2. I had fogotten who is Milton Friedman, but I will try my best to answer what I know. For my own opinion, I think employment rate is depend on the real income, if the real income is high, the employer become more willing to employ more worker to stength company's competitive power, but real income is only a theroical terms, in fact, it is difficult for employer to know the real income, so employers may be look at the nominal income rather than real income. As a result, inflation will affect the unemployment rate.