Question

In: Economics

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?

Solutions

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.


Related Solutions

How does expansionary monetary policy affect the economy in theory?
How does expansionary monetary policy affect the economy in theory?
Under flexible exchange rates, an expansionary monetary policy leads to a decrease in the interest rate,...
Under flexible exchange rates, an expansionary monetary policy leads to a decrease in the interest rate, and thus a depreciation of the exchange rate.’ Explain and critically evaluate this statement using IS-LM-IP and IS-MP-IP models.
1) explain the effect of expansionary domestic monetary policy in a country with flexible exchange rates....
1) explain the effect of expansionary domestic monetary policy in a country with flexible exchange rates. explain the linkages as the money moves through the economy and has its effects on the capital and current accounts as well as on domestic spending. Is the monetary policy enhanced or made weaker by the flexible exchange rate? explain 2)   explain the effect of expansionary fiscal policy in a country with flexible exchange rates. explain the linkages as the changes move through the economy...
Describe the effects of an expansionary monetary policy would have to the economy in terms of...
Describe the effects of an expansionary monetary policy would have to the economy in terms of interest rate, inflation rate, unemployment rate, money supply, and aggregate demand.
Illustrate and explain what will be effect of an expansionary monetary policy on output and price...
Illustrate and explain what will be effect of an expansionary monetary policy on output and price in short run and long run, under fixed vs floating ecchange rate regime and perfect capital mobility? Use IS-LM and AD-SRAS-LRAS diagrams to answer this question.
ANSWER TRUE OR FALSE 1) In an open economy an expansionary monetary policy leads to BOTH...
ANSWER TRUE OR FALSE 1) In an open economy an expansionary monetary policy leads to BOTH a decrease in interest rates and a depreciation of the exchange rate. 2) Under a flexible exchange rate regime, interest rate changes can lead to large changes in the exchange rate that can damage the economy. 3) Fixed exchange rate regimes are vulnerable to speculative attacks which can cause an exchange rate crisis. 4) Better inflation outcomes would occur if the Minister of Finance...
Provide a description of expansionary monetary policy.
Provide a description of expansionary monetary policy.
Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy....
Monetary Policy: There are two types of Monetary policies: Expansionary monetary policy and contractionary monetary policy. Key-Questions: 1. Explain each of the key terms in not more than one or two sentences (give formula or examples whichever is applicable): (a) Overnight rate of interest (b) Bank rate (c) Money multiplier (d) open market operations. 2. Discuss about the impact of each policy on the supply of money and inflation with suitable explanation and example. 3. Give a graphical explanation of...
Consider a monetary contraction in an economy operating under flexible exchange rates. Discuss the effects on...
Consider a monetary contraction in an economy operating under flexible exchange rates. Discuss the effects on consumption, investment and net exports. Explanation in words as well as use of graphs are required
Assume that (a) the price level is flexible upward but not downward and (b) the economy...
Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand. A decrease in aggregate supply, with no change in aggregate demand. Equal increases in aggregate demand and aggregate supply. A decrease in aggregate demand. An increase in aggregate...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT