in the long run, with full employemnt, a decrease in quntity of money due to restrictive monetary policy will result in a price decrease, interest rate increase, and real GDP unchanged. what happen is the economy is not full employment? will that still not change real GDP? Thanks.
It is unlikely that monetary policy would be tightened with the aim of increasing interest rates when the economy is in a recession. If it was, AD would move to the left further, AS may move a little to the right, prices would fall and the economy would move further into recession. Stagflation may ensue.
if it is not full employment-> recssion is going on? Thanks. chebychev Wrote: ------------------------------------------------------- > It is unlikely that monetary policy would be > tightened with the aim of increasing interest > rates when the economy is in a recession. If it > was, AD would move to the left further, AS may > move a little to the right, prices would fall and > the economy would move further into recession. > Stagflation may ensue.
I think that’s a safe enough assumption for purposes of this test. Less than equilibrium employment and less than equilibrium output usually go hand in hand.