Monetary Contraction Suppose the central bank wants to decrease the price level,

Question

Monetary Contraction Suppose the central bank wants to decrease the price level, but the economy is already at the natural rate of output.

a. Show the short and long run effects of a monetary contraction in this situation in the AD/AS model. You can omit the labor market and production function graphs and you may assume sticky prices for SRAS.

b. As you can see from above (hint), in the long run output stays the same and we are left with lower prices. What happens in the Short Run if the central banks tries this strategy over and over again?

Explanation / Answer

see my answer for the same question :)

http://www.chegg.com/homework-help/questions-and-answers/monetary-contraction-suppose-central-bank-wants-decrease-price-level-economy-natural-rate--q4222716

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