Question

Explain the concept “neutrality of money”. Use the money market diagram and the AS-AD diagram to...

Explain the concept “neutrality of money”. Use the money market diagram and the AS-AD diagram to explain, starting with a monetary expansion.

Homework Answers

Answer #1

The economy is initially at e equilibrium. Now there is a monetary expansion that shifts the AD curve rightward to AD' new short run equilibrium is reached at e'where price level has increased to P'and output has increased to Y'.

In the long run wages will adjust and increase because workers are employed more than full employment level. This increase in cost of production shifts the AS curve leftward to AS'. Long run equilibrium is reached at e'' where output returns back to Y and price level increases further to P''.

Thus in long run monetary policy has no effect on output which is referred to as neutrality of money.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Define and demonstrate with the AD/AS model the concept of money neutrality. Colleg level answers, please...
Define and demonstrate with the AD/AS model the concept of money neutrality. Colleg level answers, please provide detail explanation- approx 15 mark question
Explain and use an AS/AD diagram and a demand/supply diagram for the Canadian dollar to illustrate...
Explain and use an AS/AD diagram and a demand/supply diagram for the Canadian dollar to illustrate how the Bank of Canada can eliminate an inflationary gap with monetary policy. Note in the AS/AD diagram you do not need to draw the multiplied (AD +/- ∆E) aggregate demand curve. Be sure to address the impact of monetary policy on all components of AD except for G. Explain and use an AS/AD diagram and a demand/supply diagram for the Canadian dollar to...
1) Principle of Monetary Neutrality – Peter Thiel Discuss the Principle of Monetary Neutrality and explain...
1) Principle of Monetary Neutrality – Peter Thiel Discuss the Principle of Monetary Neutrality and explain why it should work. Do you believe this principle always holds true? 2)Money Demand – Peter Thiel Explain the concept of money demand and discuss how money demand will be affected if prices rise in the economy.
2. Aggregate demand a. Write down the AD relation. b. Use the IS-LM model to derive...
2. Aggregate demand a. Write down the AD relation. b. Use the IS-LM model to derive the AD curve. What could cause the shift of AD curve? 3. Monetary expansion a. Assume the economy is initially at Yn. Draw the AD-AS model and label the initial equilibrium as A. Draw the corresponding IS-LM model and indicate the equilibrium A. b. Suppose now there is a monetary expansion. Show the short run effect on price level, output, and interest rate in...
Explain and use an AS/AD diagram to illustrate the long run effects of expected demand -...
Explain and use an AS/AD diagram to illustrate the long run effects of expected demand - pull inflation.
Use the AD-SRAS-LRAS model and diagram of chapter 10 to explain the economy’s likely transition to...
Use the AD-SRAS-LRAS model and diagram of chapter 10 to explain the economy’s likely transition to a major stock market decline that reduces the wealth of U.S. consumers. Show both long run and short run outcomes for the case where the AS is upward sloping and the case where AS is horizontal
Use the money market and the aggregate demand (AD) curve to illustrate how an increase in...
Use the money market and the aggregate demand (AD) curve to illustrate how an increase in government purchases can be offset by reduction in investment.
How to explain price stability in the context of quantity theory of money and neutrality? Consider...
How to explain price stability in the context of quantity theory of money and neutrality? Consider the Fisher effect and discuss its relation with the real interest rate.
For each of the following, use the AD-AS diagram to show the short-run and longrun effects...
For each of the following, use the AD-AS diagram to show the short-run and longrun effects on output and inflation (assuming “self-correction”, i.e. no “stabilization policy”). Assume that the economy starts in long-run equilibrium. a) The government reduces taxes. b) The Fed tightens monetary policy. c) Oil prices drop sharply and unexpectedly.
The Aggregate Demand – Aggregate Supply model (AD/AS) is a guide for policymaking. Explain, using an...
The Aggregate Demand – Aggregate Supply model (AD/AS) is a guide for policymaking. Explain, using an AD/AS model, the effect on the aggregate demand (AD) of expansionary monetary and fiscal policy. First draw the diagram and then explain the impact on aggregate demand (AD).