Question

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.

Answer 1

As the move of the Fed was completely expected in the economy people in the market will quickly adjust to the level and price will increase with the wages and other variable, This will not lead to any increase in the output but only increase the price in the economy.

the new equilibrium point is shown as Ne.

Price level ($) 200 LRAS 1875 SRAS 175 1625 SRAS 150 NE 137 125 125 1125 1125 100 100 875 75 AD2 AD 25 124 19

Answer 2

Monetary policy is the process by which the central bank controls the money supply. The change in monetary policies affects the interest rate. this affects the investment of the country. This will affect the aggregate demand and, ultimately, the output/GDP.

Expansionary monetary policies increase the money supply. This decreases the rate of interest, which increases investment. This increases aggregate demand by shifting AD₁ to AD₂. This increases the price level to $ 112.5 and quantity 16.

Eventually, the rise in the prices increases nominal wages. This decreases the short-run aggregate supply.

This increases the price level to 125, and output falls to 16.

The following figure is as follow: