Hi, I thought i knew this before I saw a question that confused me. From what i understnad: Increase in AD: Shifts the AD curve to the right, cause a new short term equilibrium with the existing AS curve and prices are higher and GDP is higher. This cannot be sustained in the Long run and so the AS curve shifts up and you have a new equilibrium where prices are even higher however GDP is as it was before the increase in AD. Increase in AS: This is where the confusion occurs for me. If the central bank increased the money supply therefore causing the AS curve to shift… Can someone continue this. I want Short Run and Long Run effects on price and output. I am thinking that an increase in the money supply will have exactly the same impact as increasing AD but am not sure. Also shits in LRAS is caused by: Change in tech, resources & labour. Shifts in SRAS caused by all the above and change in wages & price of inputs. My last question is how would shifts in the SRAS and LRAS affect the SR and LR equilibrium. I have tried reading up on this in Schweser and they just focus on AD and when they do talk about AS it’s in relation to Interest Rates. Any explanations would be greatly appreciated. Also if anything was wrong in my AD explanationg please correct. Thanks
One way to think about this is that the AD curve is the one that the government basically controls with its monetary policy. In other words, the AD curve shifts in response to actual policy, regardless of whether it is expected or unexpected. It’s the AS curve that reacts to this shift and can get fooled by unexpected changes in policy. For example, it can overcompensate if an announcement of restrictive monetary policy was not credible, putting the economy in recession. The Phillips curve is the analogue to the AS curve in that it shifts in response to expectations, rather than actual changes. But you move along the Phillips curve in response to actual changes. Thus moving along the Phillips curve is akin to shifting AD, and shifting the Phillips curve is akin to shifting AS. Knowing what to shift in the frameworks for actual changes in monetary policy, and what to do to reflect changes in expectations, allows one to isolate the cost of monetary policy that is poorly executed and/or not credible.