Question

MONETARY POLICY

“Monetary policy can’t stimulate the economy because it simply prints more money causing rising prices and inflation, not more output and jobs. We shouldn’t be surprised – common sense tells us we can’t print our way to prosperity.” Would you agree or disagree? Explain. Use the model AS-AD model.

Answer 1

Disagree,

If there is unused capacity in the market or excess capacity to produce then increasing the money supply and giving money in hands of the people will lead to higher demand and thus more jobs, at this point we are at the upward sloping part of the supply curve in the market.

If the market doesn't have any excess capacity then incresing the money supply will only increase the price and not the output. but at time of recession the market is never at the potential output or the AS curve being vertical.