Effects On Inflation

Effects On Inflation


The effects of monetary policy depend largely
on which section of AS you are in just like the effects on unemployment.
However, the section of the AS or AD recites and also reflects the view
of the economy. The Keynesian region is so called because it reflects Keynesian
views. In the Keynesian model remember we said that the price levels
are constantly short run. This is reflector and this is AS. No matter
how the AD moves, the price level is always constant. Even if we try and
decrease or increase the interest rate, the AD shifts accordingly and
so does the national income, the price level is always constant. The classical
region of the AS however reflects the long run scenario in the classical
school of thought. In the long run, the economy tends towards full employment
and this is the scenario that a classical school of economics
describes. In it, if I increase the interest rate, the AD shifts
down, the national income shifts down even more and this has a cooling
effect on the economy and there is reduction in price level and this
is often used when the economy is overheated and near full capacity
which is what the classical model describes. Now, if I decrease the interest,
eventually national income increases and it now has inflationary
effects. If I am already at complete full employment, then the effects
are purely inflationary. There will be no increase in national income, no
increase in employment. Hence, it really depends on which region of the AS
or AD it is in. Generally, during a recession, your AD tends in the Keynesian
region because there is a lot of slack in the economy. During economic
boom, your AD tends to be in the classical region because you are
experiencing near full employment. There will be very low cyclical
unemployment. The analysis for inflation then differs.

2 thoughts on “Effects On Inflation

Leave a Reply

Your email address will not be published. Required fields are marked *