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

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1 Aug 2010
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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 EDQNUHVHUYHV9
PRQH\VXSSO\9
2. 0RQH\VXSSO\9!LQWHUHVWUDWH;
3. ,QWHUHVWUDWH;!UHDOLQYHVWPHQW>,@9
4. Result: 5HDO*'393ULFH/HYHO39
Observations
1. Real investment [I] is most interest-sensitive part of AD
2. International channel:
U; !YDOXHRI&DQDGLDQGROODU;H[FKDQJHUDWH
=> e[SRUWV9LPSRUWV;
=> 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
www.notesolution.com
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