# Lecture 39-Monetary Policy in AD-AS Model (Short-term)

Thursday, March 18th, 2010.

Monetary Policy in AD-AS model (short-term)

Example: Expansionary policy to reduce unemployment

1. B/D buys government securities (open market operation)

Ö EDQNUHVHUYHV9

PRQH\VXSSO\9

2. 0RQH\VXSSO\9 !LQWHUHVWUDWH;

3. ,QWHUHVWUDWH; !UHDOLQYHVWPHQW>,@9

4. Result: 5HDO*'393ULFH/HYHO39

Observations

1. Real investment [I] is most interest-sensitive part of AD

2. International channel:

U; !YDOXHRI&DQDGLDQGROODU;H[FKDQJHUDWH

=> e[SRUWV9LPSRUWV;

=> further expansion to AD

Expansionary Monetary Policy to Eliminate Recessionary Gap

Bank of Canada (B/C)

I. Policy objective: price stability

Defined as inflation rate between 1% and 3%

II. B/C influence on aggregate demand to achieve price stability can also help stabilize real

output

Price

Level

Y

Y1

AD1

SRAS

AD

recessionary gap

LRAS

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