ex Question 7 Short essay(3/4 of a page) Assuming an economy is currently at its natural...

ex Question 7

Short essay(3/4 of a page)
Assuming an economy is currently at its natural output level (full employment). Using a set of appropriately related IS-LM and AD-AS graphs, explain the impact of a monetary expansion (expansionary monetary policy) on price level, interest rate and output level in both short-run and medium run.

Expert Solution

Short Answer :

Due to the monetary expansion in the economy, The LM curve shifts to the Right there by decreasing interest rate and increasing income.

In the AS-AD model, the AD curve shifts tobthe right due to increasing purchasing power cause of monetary expansion. There by increasing the price level and the output in the economy.

Moving towards the Long Run -

The economy wants to return back to natural rate of output, thus the AD curve shifts left till economy achieves Natural rate of output and in this process the prices rise up and output is at natural rate.

Due to rise in price level, the money supply falls down and the interest rate shoots up.

Long Answer Ahead :

Rahul Sunny answered 1 year ago

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