Starting at macroeconomic equilibrium at full employment, show the effect of completely expected expansionary monetary policy using an aggregate demand–aggregate supply (AD–AS) model and discuss.
Since here , the rise in the monetary expansion is fully expected by the workers , so here rational expectation would not allow the economy to operate above the full employment level. The workers would demand the higher wage and producers will not be able to increase the production level.
Therefore here expansionary monetary policy will shift the aggregate demand to right that is AD1 , but the supply will not rise, eventually economy will witness the inflationary pressure only.
Following is the diagram:
Starting at macroeconomic equilibrium at full employment, show the effect of completely expected expansionary monetary policy...
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The graph shows the effects of an expansionary monetary policy, which, over time, results in shifts of both the aggregate demand curve (AD1 to AD2) and the short-run aggregate supply curve (SRAS1 to SRAS2).If the dot indicates the economy's initial equilibrium state, place a second dot to show the economy's new equilibrium in the short run, given that the monetary policy move was completely expected.
Refer to the above diagram, in which Qf is the
full-employment output. An expansionary fiscal policy would be most
appropriate if the economy's present aggregate demand curve were
at:
Question 3 options:
AD0.
AD2.
AD3.
None of these.
AD3 AS AD AD, AD C3 Real GDP
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