Question

Explaine briefly each of the statements whether true or false

1. 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.

Answer 1

This statement is true suppose there is a negative supply shock in economy and aggregate supply curve shift leftward from AS to AS' so real GDP decreases from Y to Y' and price rises from P to P' now government apply expansionary monetory policy which increases money supply in an economy. So aggregate supply curve shift rightward from AS' to AS but increase in money supply leads to increase in consumer spending which shift aggregate demand curve rightward from AD to AD' so real GDP rises from Y' to Y" but at same price level P' price doesn't change. So it cannot stabilize both price level and real GDP.

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