In order to stimulate the sagging European economy, the European Central Bank (E

Question

In order to stimulate the sagging European economy, the European Central Bank (ECB) decides to engage in expansionary monetary policy. Your job as one of the advisors to the ECB is to explain to the public what this policy expects to accomplish.

Using a short run aggregate supply and aggregate demand graph, illustrate what happens to the overall economy as a result of this monetary policy.

Which curve shifts? _____________

What happens to the following (up, down, stay the same):

Output: _________________             Employment: _____________________

Price levels: ___________________

SHOW YOUR GRAPH:

Explanation / Answer

Changes in a country's money supply shifts the country's aggregate demand. The aggregate demand curve illustrates the relationship between the quantity of output that is demanded and the aggregate price level.

Output: will increased as a result of increased spending. Price: It will also be higher.

Employment: There will be an increased number of jobs due to this expansionary monetary policy.

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