why the short run effect is : interest rate decrease? because easy to borrow money? is the long run effect: interest rate increase, real GDP increase? Thanks.
LM curve shift right, so interest rate decrease. since interest rate decrease, it is easier to borrow money. in the LR, no change to real GDP, or real interest rate.
The effect can be analyzed using either the AS-AD or Phillips Curve framework. The bottom line is that the short-run effect is lower unemployment, higher GDP and higher prices. The only long-run effect, however, is higher prices. (This assumes the economy was in equilibrium before the policy change. If it wasn’t, the short-run effects may persist.) Consider: (1) AS-AD. Expansionary monetary policy shifts the AD curve to the right. If the policy is not anticipated, then the short-run aggregate supply (SAS) curve will take some time to react. The temporary result is output and prices higher than their equilibrium level. Eventually SAS will shift back to the left due to higher input costs and the only long-term effect will be higher prices. (2) Phillips Curve. If the policy is not anticipated, no shift in the Phillips Curve occurs. We see the effect of the unanticipated change by moving along the Phillips Curve line to the left. What we see is that the decrease in interest rates will tend to increase inflation and reduce unemployment in the short-run. In the long-run, people will revise their expectations and the Phillips curve will shift. The only long-run effect is higher inflation. Note that the long-run effects under the AS-AD analysis and Phillips curve analysis are the same: only prices increase.
chebychev Wrote: ------------------------------------------------------- > The effect can be analyzed using either the AS-AD > or Phillips Curve framework. The bottom line is > that the short-run effect is lower unemployment, > higher GDP and higher prices. The only long-run > effect, however, is higher prices. > > (This assumes the economy was in equilibrium > before the policy change. If it wasn’t, the > short-run effects may persist.) > Why would you say that it may persist if it wasnt in equilibrium. Wouldnt the supply curve adjust itself and bring it back to equilibrium sometime in the future?