Jump to content
Sign in to follow this  

weird econ question

Recommended Posts

So the question is -- 

If Expansionary monetary policy can intensify businesses to spend more on capital, it implies EMP increases the potential output right? as producers produce more. So the effect of EMP will be increase in both aggregate demand and aggregate supply?

 

thx

 

Share this post


Link to post
Share on other sites

So the question is -- 

If Expansionary monetary policy can intensify businesses to spend more on capital, it implies EMP increases the potential output right? as producers produce more. So the effect of EMP will be increase in both aggregate demand and aggregate supply?

 

thx

 

Yes that's true. Demand side policies influence AD, and investment is one of the components of AD, so any expansionary demand side policy increases investment and hence increases AS. But its main effect is on AD and not on AS, so although it affects both, the effect on AD is greater. It is correct to say that expansionary monetary increases both, but the focus is generally on AD.

 

Hope this helped :)

  • Like 2

Share this post


Link to post
Share on other sites

Hi,

 

If you're writing about this in your commentary make sure that it's the AD that shifts (to the right). Ossih did a good job in explaining that businesses spending on capital is what we call investment, and since I is a component of AD, an increase in that (plus in consumption as well) leads to an overall increase in AD. However, just because firms by more capital, it does not necessarily mean they will be more productive too (or have decreased costs of production overall). In other words, in the LR, an increased money supply (thanks to EMP) will mostly have an inflationary effect and not much influence on the overall output produced. This is represented by the perfectly inelastic LRAS curve.

 

Cheers,

EconDaddy

IB Economics teacher and examiner

www.econdaddy.com

  • Like 1

Share this post


Link to post
Share on other sites

Hi,

 

If you're writing about this in your commentary make sure that it's the AD that shifts (to the right). Ossih did a good job in explaining that businesses spending on capital is what we call investment, and since I is a component of AD, an increase in that (plus in consumption as well) leads to an overall increase in AD. However, just because firms by more capital, it does not necessarily mean they will be more productive too (or have decreased costs of production overall). In other words, in the LR, an increased money supply (thanks to EMP) will mostly have an inflationary effect and not much influence on the overall output produced. This is represented by the perfectly inelastic LRAS curve.

 

Cheers,

EconDaddy

IB Economics teacher and examiner

www.econdaddy.com

So EMP will not affect the long run aggregate supply even though investors are investing more on capital and the production capability of the country increase? I thought, if the production capability increases, the economy's potential output increases as well.

  • Like 1

Share this post


Link to post
Share on other sites

Hi,

 

To put it very (very) simply, printing money (one of the ways EMP works - by buying bonds) will not increase the production capacity of a nation. Other EMPs, such as decreasing the reserve ratio, or decreasing the interest rate will also increase the money supply. But the fact that there is more money in the economy does not necessarily mean that the production capacities will also increase. More money will most likely lead to more consumption and investments (and of course to the decrease in the value of money = inflation). This shifts the AD to the right, which means the national output will increase in the short run (as there is a movement along the SRAS curve).

 

The production capacities will improve thanks to supply-side policies. This leads to LR growth. And EMP is not such a policy.

 

Cheers,

EconDaddy

IB Economics teacher and examiner

www.econdaddy.com

Edited by EconDaddy
  • Like 1

Share this post


Link to post
Share on other sites

Hi,

 

To put it very (very) simply, printing money (one of the ways EMP works - by buying bonds) will not increase the production capacity of a nation. Other EMPs, such as decreasing the reserve ratio, or decreasing the interest rate will also increase the money supply. But the fact that there is more money in the economy does not necessarily mean that the production capacities will also increase. More money will most likely lead to more consumption and investments (and of course to the decrease in the value of money = inflation). This shifts the AD to the right, which means the national output will increase in the short run (as there is a movement along the SRAS curve).

 

The production capacities will improve thanks to supply-side policies. This leads to LR growth. And EMP is not such a policy.

 

Cheers,

EconDaddy

IB Economics teacher and examiner

www.econdaddy.com

I am so sorry, I am still confused about the idea of capital. With the lower interest rate, there will be an increase in investment on human and physical capital. I thought improvement in human capital and physical capital means the economy can produce more as e.g , workers have better level of health and training. thus the economy can produce more. So EMP will not INDIRECTLY affect the LRAS? I am sorry for keep bothering you.

Share this post


Link to post
Share on other sites

Yes, INDIRECTLY, it might. But it usually has a much larger influence on the price levels. So in your commentary, just be careful about the wording.

 

Cheers,

EconDaddy

IB Economics teacher and examiner

www.econdaddy.com

Edited by EconDaddy

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.