Re: Dse 2010 Q44

Posted by Dreyfus on Jun 18, 2014; 5:38pm
URL: http://discussion-forum.276.s1.nabble.com/Dse-2010-Q44-tp7592978p7593046.html

@ASH ....When all markets ie money market, goods market and labour are in equilibrium that is the AD =AS holds at a stable output ie at natural rate of output so that expected price level = actual price level.
If money stock increases the LM curve initially will shift to the right and So does the AD curve. Now  in equilibrium output is greater than the natural level of output and actual price level is greater than expected price level.
This price level difference will hv two effects, one on the asset market and other on the Labor market but these effect will move simultaneously.
In asset market, since price level has risen this will force LM to shift leftward but this would not shift the AD Curve.
Nd in labour market since actual price level is greater than expected price level, this will shift the AS curve upward to the left.
The LM will shifts left to its original location and at the new equilibrium will reach where again natural level of output = actual level of output and thus expected price level =actual price level but this level will be comparatively higher from the original value.
Since LM is back to its original position therefore real money supply is unchanged but price level do hv increased thus the real wage rate ie nominal wage/price level have fallen.