qweewqqwe Posted May 1, 2015 Report Share Posted May 1, 2015 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 Reply Link to post Share on other sites More sharing options...
Ossih Posted May 1, 2015 Report Share Posted May 1, 2015 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 1 Reply Link to post Share on other sites More sharing options...
EconDaddy Posted May 1, 2015 Report Share Posted May 1, 2015 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,EconDaddyIB Economics teacher and examinerwww.econdaddy.com 1 Reply Link to post Share on other sites More sharing options...
qweewqqwe Posted May 1, 2015 Author Report Share Posted May 1, 2015 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,EconDaddyIB Economics teacher and examinerwww.econdaddy.comSo 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. 1 Reply Link to post Share on other sites More sharing options...
EconDaddy Posted May 1, 2015 Report Share Posted May 1, 2015 (edited) 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,EconDaddyIB Economics teacher and examinerwww.econdaddy.com Edited May 1, 2015 by EconDaddy 1 Reply Link to post Share on other sites More sharing options...
qweewqqwe Posted May 1, 2015 Author Report Share Posted May 1, 2015 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,EconDaddyIB Economics teacher and examinerwww.econdaddy.comI 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. Reply Link to post Share on other sites More sharing options...
EconDaddy Posted May 1, 2015 Report Share Posted May 1, 2015 (edited) 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,EconDaddyIB Economics teacher and examinerwww.econdaddy.com Edited May 1, 2015 by EconDaddy Reply Link to post Share on other sites More sharing options...
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