Long–Run Consequences of Stabilization Policies

They are directly proportional

They are sometimes proportional and sometimes inversely proportional

They have no relationship

They are inversely proportional

The relationship between money supply and price level cannot be determined.

Prices tend to rise.

Prices tend to fall.

There is no change in prices.

Borrowers are discouraged since their debts will appreciate in real value over time making repayment more difficult if they expect prices will not rise substantially over time relative costs of goods versus fixed nominal loan repayments decrease meaning repaying loans gets relatively more expensive.

Borrowers are encouraged because their future repayments will be less burdensome in real terms if they anticipate low stable prices in the future when repaying debts with nominally fixed payments becomes easier with rising incomes.

The velocity would decrease as people hold onto their money longer.

The velocity would increase as people spend their money more quickly.

Consumer confidence has a direct relationship with interest rates, not velocity.

The velocity would be unaffected by consumer confidence levels.

International trade organizations (e.g., WTO).

The central bank (e.g., Federal Reserve).

The executive branch (e.g., President or Prime Minister).

Non-profit organizations (e.g., charities).

Stagflation

Deflation

Recession

Inflation

A decrease in overall unemployment.

An increase in long-term investment.

A stabilization of price levels.

An increase in inflation rates.

It leads to immediate wage increases that match the targeted rate of inflation for workers.

It reduces government debt levels by decreasing the cost of borrowed funds over time.

It ensures a consistent zero percent inflation rate, eliminating price level changes.

It creates predictable financial conditions that facilitate long-term planning for businesses.

The currency loses value rapidly.

The currency appreciates gradually.

The currency fluctuates with no clear pattern.

The currency remains stable over time.

Interest rate for long-term loans

The value of the local currency

Real prices

Unemployment rates