In case of increase in money supply, i.e, adaption of expansionary monetary policy, the aggregate;demand curve will shift outward in short run. The mechanism is;As a result of expansionary monetary policy, the LM curve of the economy ahift outward;without any change in IS curve. This result in increase in aggregate output level of the economy;as well as lowring interest rate. As a result, economy moves away from equilibrium, from point;C to B, resulting in inflationary gap.;In long run, due to increase in aggregate price level of the economy, the economy moves from;point B to point A, whre the output level is equal to full emplpoyment output, but the price level;is higher.;Refer to the graph;An increase in the money supply would move the economy from C to what point in short;run and long run? Discuss?
Paper#30593 | Written in 18-Jul-2015Price : $22