Hello.
Yes, the statement is correct.
An expansionary monetary policy (i.e., an increase in the money
supply) shifts the aggregate demand curve to the right because more
money means lower interest rates, easier borrowing, and more spending
by businesses and consumers.
"Increases in the Money Supply will tend to increase aggregate demand
in the economy or shift the AD curve to the right. Decreases in the
Money Supply will result in a decrease in AD or shift the AD curve to
the left."
http://www-biz.aum.edu/economics/Macronotes/Macrochap4.html
Thus, if the aggregate supply curve is horizontal, a shift to the
right of the AD curve will have the maximum effect on real output. For
an illustration of this, see Figure 25-5(a) on page 569 of "Aggregate
Demand, Aggregate Supply, and Modern Macroeconomics" from mhhe.com
(PDF format so the Adobe Acrobat reader is required)
http://www.mhhe.com/economics/colander4/graphics/colander4econ/info/ch25.pdf
On the other hand, if the aggregate supply curve is vertical, a shift
to the right of the AD curve would have no effect on real output. It
would just increase the price level.
Another way of looking at this is to consider that if the aggregate
supply curve is horizontal, it means that prices are fixed. If prices
are fixed, any increase in spending will have an identical increase in
output. On the other hand, if the aggregate supply curve is vertical,
it means that prices are perfectly flexible. If prices go up
commensurately with the increased spending, then the net effect on
output is zero.
"In the long run, when AS is vertical, fiscal and monetary policy
efforts to increase output will be ineffective."
source: Macro Notes 5: Aggregate Demand and Supply, hosted by
University of Washington:
http://www.bothell.washington.edu/faculty/danby/notes/notes14.html
search strategy: "as curve is vertical", "as curve is horizontal",
"prices are fixed", flexible
I hope this helps. |
