Describe the behavior of consumption, investment, labor, productivity, wages, the price level and the money supply over the business cycle both in terms of correlation, magnitude and lead vs lag. Give the economic intuition behind the results on consumption, productivity, wages and price levels. For some of these rather than the intuition you should explain the importance of this evidence in terms of supporting/rejecting important theories in economics.

As the money supply rises, then it would have impacts on consumption, investment, wages and price level as they are related.

During a recession, the increase in the money supply would increase the purchasing power of people as this serves as oil to their consumption. As consumers have increased the level of purchasing power, then it would also strive producers to increase their production of goods and services. As a result, there is a flow of goods and services in the economy. But this money supply would only lead to giving an uplift to the consumers and producers. Hence, it would only give a raise to the nominal GDP which could arise due to a change in prices or output. Severely, it would increase the nominal GDP because of the rise in prices. But it doesn?t imply the real GDP.

Real GDP won?t be arisen up because, in short run, it is not possible for the firms to expand the production much; whereas, in long run, it would arise, if the producers are as much motivated to increase their production by making an investment. Since this investment would be positive if this investment is based upon the productive activities. But if they are concerned with the mean of speculation, then it has no significance.

Increase in the money supply would lift up the economy from its downturn, so it will contribute to increasing nominal wages which incentivizes labor to increase their labor supply. As a result, labor supply increases which are a good indicator of the economy.

And if this is a topic about the price levels, then money supply and prices go hand in hand. It is because the increase in money supply promotes the aggregate demand for goods and services which leads to an increase in prices in short-run as the economic agent has no lots of resources. Hence, the scenario of rising prices starts which creates inflation. Hence, both of these variables are directly proportional.

As the real GDP is very much related to the increasing panel of economic activities but the nominal GDP does not give very much good indicative of growth because it could be influenced by the rising prices also.