As we have discussed, the production function will determine aggregate supply in

Question

As we have discussed, the production function will determine aggregate supply in the long run. That it , the vertical position of the LRAS and the level of full employment income(Y-bar) represents the maximum possible of output level with full employment of all factor resources operating with, and using, the level of technology available. Now you want to “improve” the aggregate production function to increase the supply capacity of the economy. That it, you desire to move the vertical LRAS to the right on the AS/AD diagram.

Let’s say your economy is at a less than full employment equilibrium WITH AN UPWARD SLOPING SHORT RUN AGGREGATE SUPPLY CURVE(SRAS). Your LRAS suddenly moves to the right. You want to get back to full employment as quickly as possible.(CLOSED ECONOMY)

If monetary policy is chosen, what might happen to PRICE EXPECTATION and how many these expectations affect the outcome of your policy initiative? If fiscal policy is chosen, what might happen to price expectations and how economy will be affected?

Explanation / Answer

If monetary policy is chosen, price expectation would decrease gradually and thus instability will increase If fiscal policy is chosen, price expectation would increase gradually and thus instability will decrease Please rate highly appreciated

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