If there are a high proportion of flexible price firms in the economy then expansionary monetary...

If there are a high proportion of flexible price firms in the economy then expansionary monetary policy is effective in increasing output in the short run, other things equal. True, False, Uncertain. Explain *

There is an answer elsewhere on Chegg that states that increase in MS shifts AD curve to right but that the AS curve is vertical -- however, this is short run and AS curve should not be vertical in short run?

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Expert Solution

This statement is false. If the price level is flexible in the short run then much of the increase in the real GDP due to you any monetary expansion will be reduced because the price level will increase which will discourage some of the consumption.

If price level is fixed then aggregate supply is horizontal and when the aggregate demand shifts to the right with monetary expansion the size of the shift in the aggregate demand is not reduced and so the real GDP in is increased by full.

If price level is flexible, aggregate supply is upward sloping and when aggregate demand shift to the right with monetary expansion the size of the shift in the aggregate demand is reduced partly by the increasing price level. So the real GDP is increase but not by full. This indicates that monetary policy is less effective in increasing the output in the short run if the prices are flexible related to the situation in which the prices are fixed.

Rahul Sunny answered 10 months ago

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