Question

In: Economics

In the AD-AS model, monetary policy cannot stabilize both the price level and the level of...

In the AD-AS model, monetary policy cannot stabilize both the price level and the level of real GDP following a shock to aggregate supply

True or False? Would appreciate a detailed explanation. Thanks!

Solutions

Expert Solution

The given statement is True.

--

Explanation:

When a shock to AS takes place, the AS curve shifts.

Suppose a negative shock affects AS, shifting it to the left. This raises the price level, and lowers the GDP level.

Monetary policy will affect the AD curve, and not the AS curve. To correct the effect of the negative AS shock, expansionary monetary policy will shift AD to the right. Due to this, real GDP will be restored, but price level will be higher than even before.

On the other hand, if prices are attempted to be restored, this can be done by contractionary monetary policy. This will shift AD to the left. This will cause prices to come down (after the negative AS shock), but real GDP will be much lower than before.

--

Therefore, there exists a trade-off: to bring back the economy's real GDP level, AD curve will have to be shifted to the right, thus causing a further increase in the price level. On the other hand, to maintain price level, AD will have to be shifted to the left, but real GDP will fall.

Thus, both price level and real GDP cannot be stabilized at the same time.

Rahul Sunny answered 3 years ago
Next > < Previous

Related Solutions

In the AD-AS model, monetary policy cannot stabilize both the price level and the level of...
In the AD-AS model, monetary policy cannot stabilize both the price level and the level of real GDP following a shock to aggregate supply. True or False?
Q2. Fiscal policy, like Monetary policy, cannot change the natural level of output. Why then is...
Q2. Fiscal policy, like Monetary policy, cannot change the natural level of output. Why then is MP considered neutral but FP is not?
In the AD-SRAS-LRAS model, what happens to the price level and the unemployment level in the...
In the AD-SRAS-LRAS model, what happens to the price level and the unemployment level in the short-run when there is an increase in consumption spending (C)? Group of answer choices a.Price level increases and unemployment level increases. b.Price level decreases and unemployment level falls. c.Price level increases and unemployment level falls. d.Price level decreases and unemployment level increases. Output gap is the difference between: Group of answer choices a.Nominal Output and Short-Run Output b.Real GDP and Nominal GDP c.Actual output...
What are two drawbacks to using monetary policy to stabilize the economy
What are two drawbacks to using monetary policy to stabilize the economy
Briefly explain whether the following statement is true or false. In the AD-AS model, monetary policy...
Briefly explain whether the following statement is true or false. In the AD-AS model, monetary policy cannot stabilize both the price level and the level of real GDP following a shock to aggregate supply. Please answer elaborately with proper reasoning, graphs and equations. Also include a policy example.
Should the government use monetary and fiscal policy in an effort to stabilize the economy?
27. Use of discretionary policy to stabilize the economy Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy and the pros and cons of using these tools to combat economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in March 2020.Suppose the government...
Should the government use monetary and fiscal policy in an effort to stabilize the economy?
Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations.The following graph shows a hypothetical aggregate-demand (AD) curve, short-run aggregate-supply (AS) curve, and long-run aggregate-supply (LRAS) curve for the Canadian economy in March 2023.Suppose the government decides to intervene to bring the economy back to the natural...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy?...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy?...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy?...
When is it appropriate to use monetary and fiscal policy to stimulate or stabilize the economy? b. When is it inappropriate to use monetary and fiscal policy to stimulate or stabilize the economy? c. What specific fiscal policy tools would you use to stimulate aggregate demand and how? d. What specific monetary policy tools would you use to stimulate aggregate demand and how? e. What is your conclusion, should policymakers use the monetary and or fiscal policy to stimulate aggregate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT