For less than full employment, if money supply grows, there is rapid growth in GDP. Based on the equation Nominal GDP =PY. Does it increase price level§ or real GDP(Y)?
if it’s not anticipated increase in gdp if it is anticipated increase in prices
agree with florinpop.
What is the reason behind this. I was under the impression that if it is unanticipated, both will increase.
it will increase both if the economy starts with under natural GDP. it will increase only price level but not real GDP if the economy starts at full employment.
In this case it is unanticipated and below the natural GDP so shouldnt both increase
its different in long and short run for unanticipated for short run it is increase in gdp for long run is increase in prices too
When u say short run does it only mean the demand curve moving out due to the anticipated increase in money supply When u say long run, does it mean supply adjusting itself. I d really appreciate these ans? Thanks
this is what i think happens. increase in money supply creates excess funds on the market. if it is not anticipated then producers won’t increase prices. because of low cost funds the demand will increase. producers will produce more and therefore output increases. but production can adjust itself only to a point. after that, the excess money will create increase in demand with a low response from supply. that will create prices to go up if it is anticipated an increase in the money supply, producers will expect inflation. they don’t want to sell their products for less money- in real terms. therefore they will increase their prices and production will stay put This assumptions are made if gdp is under inflationary gdp - that is under full employment rate
lets assume AD-AS diagram with an vertical LRAS… ad: y=C+I+G+(X-M) or MV=PY as: Y=F(L,K,T) function of labor, capital and technology monetary or fiscal policy shift the AD curve. the adjustments regarding the money wage rate shift the AS curve. these are anticipated or not. So basically what it comes down to is: shift in AD due to taxes, money supply etc… is anticipated or not by the society/economy. Depending on if “correctly” anticipated the shifts in AD will increase/decrease P and/or Y in the SR. In the LR the economy will converge back to the LRAS.
I believe it does not matter whether anticipated or not. Because the economy was run below full employment, the increased money supply will push up AD, thus leading to both increased price level and real GDP till economy running at full employment. The AS won’t change until AD rises too far, leading to overheat (unemployment < natural rate). Anticipation of inflation decides change in wage rate, which consequently changes AS.